What if oil was priced for sale in euros instead of US dollars? Would the world (or America) be a different place?

I saw an excerpt of a very interesting interview in the German magazine der spiegel recently that talked about just that possibility. (Thanks to Dave at The Galloping Beaver blog for bringing the Der Spiegel interview to my attention.) But first...

It's no secret that the American government would like to see a stronger yuan. China has been faced for the last few years with something of a conundrum: it would like the yuan to be stable in relationship with currencies like the US dollar and the euro, but those currencies are themselves going in opposite directions.




When the yuan's value improves against the US dollar, the cost of Chinese goods at Wal-mart and Target goes up. Fewer American's buy them, companies in China suffer, and Chinese workers lose their jobs. So China doesn't want the yuan-dollar relationship to change too quickly.



But the dollar's decline in recent years has had a secondary impact on China. Oil sales are denominated in US dollars. As the dollar has decline, the price of oil has gone up. And energy hungry China is paying more now for oil than it did a year ago. The price of oil has become a reason for the the Chinese to consider allowing the yuan to float more freely and perhaps gain strength against the US dollar.

So the Der Spiegel interview with OPEC Secretary-General Abdalla Salem el-Badri on January 20 was intriguing.

SPIEGEL: Mr. Secretary-General, the price of a barrel of crude oil hit the $100 mark for the first time in early January. While consumers are burdened with high prices, the producers are busy filling their pockets. Did you celebrate at OPEC on that day?

El-Badri: No, why should we? We are interested in reasonable prices. We want stability. Besides, the average price per barrel was $69 last year. Only a very small amount of oil was traded at above $100, and only for a very short time. It is a gamble. It was a single dealer who miscalculated and lost money as a result.

Later in the interview...

SPIEGEL: And are you in favor of abandoning the practice of trading in dollars as Venezuela and Iran have demanded?

El-Badri : The euro is currently the world's strongest currency. A change can be made, but it will take some time. It took many years for the dollar to become a dominant currency in the oil business. But in the future it will not be that difficult to change.

Hmmm. Just like that - in the future it will not be that difficult to change...

El-Bardi goes on to say some fascinating things - like that high gas prices at the pump in America have more to do with America's ability to refine oil and with the taxes it places on gasoline than with the price per barrel that OPEC charges. (The tax situation is varied from state to state. At the moment there's a federal tax of 18.4 cents on gas in the U.S. and the total tax ranges from a low of 26 cents per gallon in Alaska to 64 cents per gallon in California.)

But I digress... And the simple point is that dropping to US dollar as a way to denominate oil sales is being discussed. Venezuela and Iran are promoting the idea. And if it happened, there'd be one less reason, in my view, for China to speed up any revaluation of the yuan.

Who that's good for, who that's bad for, etc., I leave for others. But the issue rarely gets factored into discussions on the relationship between the US dollar and the yuan renminbi. And perhaps it should...