Seeking Alpha

Venezuela's Move To Non-Dollar Oil Pricing Will Have No Effect Upon Anything

by: Tim Worstall
Tim Worstall
Tech, banks, gold & precious metals, natural resources

Nicolas Maduro in Venezuela wants to move away from the country's oil being priced in US dollars.

Instead, both imports and exports should be priced in euro, yuan, rupees, anything but dollars.

This will have nearly no effect upon anything at all, given the liquidity of the FX markets.

There's a common enough theory out there that the general use of the US dollar in the oil business adds somehow to American power and or prestige. So much so that we occasionally see people insisting that if only the oil business, or perhaps international trade more generally, were not dollar-denominated, then the US would lose its position as the global hegemon. There was much of this concerning both Iran and Iraq some time ago when they mooted that oil deals should be done in euros. Some even ascribed the overthrow of Saddam Hussein to a US insistence that such a thing must not happen.

This is all nonsense, as is Nicolas Maduro's invocation of the same idea here over Venezuela's oil exports. It's just not going to make much difference to anything:

This week Venezuela announced that it will no longer accept payment in U.S. dollars for its oil, a major divergence from typical oil market practices. It is said that Venezuela and its national oil company, PDVSA, will operate with euros. The given explanation is that this is an attempt to circumvent sanctions imposed by the U.S. government, but the real reason may be a sales pitch to China, India, and other large oil markets, that Venezuela hopes to attract as customers.

Not using dollars doesn't make that Venezuelan crude any more attractive to anyone else in the slightest. It's still heavy stuff, which a refinery has to be specifically adjusted to handle. Which version of money is used to pay for it is just an irrelevance.

This might be a useful clue as to why it is actually doing it:

We are making the technical and technological adjustments … so that Dicom, which is our main space for auctioning currencies, develops towards [currencies] other than the dollar,” he told teleSUR.

The announcement was made amid reports the government’s main currency auction system, Dicom, had abruptly stopped selling dollars. Lobo confirmed the auction house had been closed, but said it will restart operations soon.

Its internal system for allocating scarce dollars to importers is falling apart only three months after it created it. Politically, it might be better to change the system rather than admit that failure.

Of course, some are misunderstanding this entirely, as Maduro himself probably is:

The measure is seen as an act of retaliation against the United States,

It makes just no difference to the US at all. And this doesn't matter either:

Venezuela on Friday began listing the price of its oil in the Chinese yuan, following President Nicolas Maduro's announcement last week that he would rid the economy of the "US imperialist system."

There is one, and only one, manner in which the currency used for oil trading matters in the slightest. Say that we have a system as we do now, the use of the dollar to price oil - do note that there's absolutely nothing at all, anywhere, which says that oil must be paid for in dollars, it's only that everyone uses the dollar-denominated price to work out what the price will be in any other currency or even commodity. There is a power which the US does have over the oil trade; that is, it is possible for the US to insist upon sanctions against anyone who uses dollars to trade with a particular country.

This has actually happened too and it was part of the recent nuclear sanctions against Iran. Any bank which handled dollar transactions would find itself staring at the US Federal Government. It happened with Sudan; one French bank was dealing with that country in dollars, through its European arm, and ended up having to pay billions in fines. For all US dollar transactions, in the end, clear through the territory of the US. Thus the US can - in fact even if the law here is a bit dodgy - cut off a country from dollar transactions through the banking system.

The US has, so far at least, specifically ruled out imposing those sorts of sanctions upon Venezuela. At which point we might say, well, it could, so Maduro is just preparing for this.

And if that's what we say the result will be then that's fine. It's the further implication, that this matters to the dollar, the US, or the global oil market which is incorrect. It simply will have no effect there at all.

The reasons are two-fold, the first being that in theory it just doesn't matter what is used to pay for something. If the oil trade were determined and priced in gold it wouldn't change the price of gold at all. That it is in US $ doesn't change the price of the $ either.

The second is that Venezuela's oil trade is simply trivial compared to those foreign currency markets. Their size is obviously an estimate but $5 trillion a day is a reasonable one. That's for some 250 trading days in a year. $1,250 trillion a year of throughput, therefore. Venezuela's oil business is some $25 billion a year. A little more perhaps if we add in its oil imports - yes, it imports US light crude to mix with its heavy domestic production.

Venezuela's oil trade is, therefore, equivalent to 0.002% of the annual turnover of the foreign exchange markets. That's simply not an important number, it's not going to affect anything at all even if the theoretical reason it doesn't matter doesn't hold.

We can and probably should view this as the usual anti-Yanqui posturing, let's free Venezuela from the yoke of the Almighty Dollar. Other than domestic politics it's going to have no economic effect upon anything at all.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.