In the comments beneath this post, Bardon remarks:
But there is another complexity here the Kissinger instigated Petrodollar.
The US economy would collapse overnight if this mechanism stopped, hence they need the Saudis and they need that Aramco IPO on Wall Street. BRICS are anti petrodollar and are working very hard to undermine and replace it, its the kind of stuff that starts wars.
The systems is such that non oil producing countries that want to buy oil must buy it in US$. So lets say Greece wants to buy Kuwaiti oil, it will do this in US $ which is neither the currency of the seller nor the buyer, meaning that it has to have US$ in the first place.
If the petrodollar system collapsed and remember the US could not even touch the sides with supplying oil to meet market demand, and no one buys it in US$ anymore then the demand for US$ would stop and it would absolutely tank overnight. Iran can’t wait to sell it in anything other than US$ and it looks like the BRICS nations are a likely taker, so they had better be quick in stopping Iran making any trades.
This theory is frequently brought forward to explain geopolitical developments involving the United States, and while others (Mr Worstall, for example) has dealt with it in the past, I might as well do so again.
The reasoning goes something like this. The US needs to ensure a demand for its currency, and therefore insists all oil around the world is sold in USD. If a country were to switch to selling oil in euros or another currency, the USD would nose-dive and destroy the US economy. The reason the US deposed of Saddam Hussein and Muammar Gaddafi was because each were about to start selling their oil in euros or gold. This theory even beats “wars for pipelines” into second place as an explanation for American foreign policy, and it is a persistent one. Sadly it’s not just the preserve of cranks on Zerohedge, I’ve actually had an MBA graduate insist that a country trading oil in euros presents a serious threat to US financial hegemony. And here’s a recent article in The Huffington Post telling us:
Non-Dollar Trading Is Killing the Petrodollar — And the Foundation of U.S.-Saudi Policy in the Middle East
It’s nonsense of course, and here’s why. According to this site, the value of oil traded is $1.7 trillion dollars per year. Looked at another way, oil production was about 97m barrels per day in 2015; let’s call it 100m making 36.5bn barrels a year. Assuming a sale price of $100 per barrel, annual production is worth $3.65 trillion dollars. Assuming $60 per barrel, it’s worth $2.19 trillion dollars. The exact number doesn’t matter, we’re just after an order of magnitude here.
Now according to this site, total foreign exchange (FX) transactions are valued at $5.1 trillion dollars per day. Trade in USD accounts for a whopping 88% of that, i.e. $4.49 trillion per day. According to another site, total FX was $5.3 trillion per day in 2013 of which USD trades accounted for 87%, i.e. $4.6 trillion per day. Again, we only need orders of magnitude here.
So, the demand for dollars driven by oil sales equals around $2-3 trillion dollars per year. Meanwhile, the overall demand for dollars equals around $4.5 trillion dollars per day. From these figures alone one can conclude that the currency in which oil is traded makes no difference whatsoever to the value of the USD. Reasons for going to war and bringing about regime change vary, but it is unlikely anyone would do so to protect one-three-hundredth of its currency demand.
So what would happen if a country switched to selling oil in yuan or euros? Well, those who hold USD would go to the FX market and buy yuan or euros at the prevailing rate and then use them to buy the oil. No need for any wars when you have a large and functioning FX market. You’ll notice that those peddling the myth of petrodollars driving American foreign policy never go into details of how all it is all supposed to work. There are good reasons for this.