Oil to be Priced in ...?

On Friday Saudi Arabia announced that OPEC talks would not include a U.S. Dollar discussion.

Sometime between Friday and Sunday OPEC lost its collective mind and announced OPEC Interested in Non-Dollar Currency.

Iranian President Mahmoud Ahmadinejad said Sunday that OPEC's members have expressed interest in converting their cash reserves into a currency other than the depreciating U.S. dollar, which he called a "worthless piece of paper." His comments at the end of a rare summit of OPEC heads of state exposed fissures within the 13-member cartel -- especially after U.S. ally Saudi Arabia was reluctant to mention concerns about the falling dollar in the summit's final declaration.

"All participating leaders showed an interest in changing their hard currency reserves to a credible hard currency," Ahmadinejad said. "Some said producing countries should designate a single hard currency aside from the U.S. dollar ... to form the basis of our oil trade."

Iran and Venezuela have proposed trading oil in a basket of currencies to replace the historic link to the dollar, but they had not been able to generate support from enough fellow OPEC members -- many of whom, including Saudi Arabia, are staunch U.S. allies.

But by Sunday, it appeared that Saudi Arabia had compromised. Though the final declaration delivered Sunday did not specifically mention concern over the weak dollar, the organization directed its finance ministers to study the issue. Iran's oil minister went a step further and said OPEC will form a committee to study the dollar's affect on oil prices and investigate the possibility of a currency basket.

Politics vs. Sanity

Before continuing, it is clear that this basket of currencies deserves a name. I propose we call it the WHISIT. This stands for "What the Hell Is It?" But the name does not really matter, If you have a better one, please send it my way.

Regardless of what the basket is called, politics is ruling over sanity.

No one ever buys anything in a basket of currencies. For example, go to the store and try and buy a loaf of bread in WHISITs. It can't be done. Nor can one buy gas in WHISITs, or for that matter anything else. The same holds true in Europe. I defy anyone to buy anything anywhere in a basket of currencies regardless of what that basket is called. The only way it can be done is by exchanging everything in the basket to the local (favored) currency. What a headache for those walking around with Swiss Francs in their pocket trying to buy a loaf of bread in the US.

Is oil really any different? I propose it is not. However, let's imagine for a second that OPEC actually went ahead with this nonsense. They won't, but let's pretend they do.

That night you tune into CNBC and the commentator says "crude reached a new high at 102.3 WHISITs". This would last about 3 days or less simply for the novelty of it. Eventually someone would be smart enough to figure out what percentage the US$ was of WHISITs and compute a price of oil in US$. Every country on earth would do the same thing and that would be the end of discussion of WHISITs for all practical purposes.

WHISITs vs. Dollars vs. Euros Challenge

It simply does not matter what currency oil is priced in outside of something like Yap Island stones or other illiquid currencies.

I presented the latest refinement to my logic in Oil Pricing Unit Red Herring after OPEC admitted over the weekend that oil already trades in Euros.

This by the way is an open challenge. If anyone can refute the logic I presented as to why pricing unit matters, please send it my way. I simply ask everyone to please stick to a refutation of the 10 point logic I presented as opposed to submitting red herring analysis on side issues.

Pricing in WHISITs would not change my logic one iota. All such pricing would do would be to confuse the heck out of everyone until WHISITs were converted back to the local currency by local news agencies. This would take at most three days, and more likely one.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com
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