Sooner or later

Oil/dollars: Oil and the US dollar used to go together almost as naturally as gold and greed. Times change.

Crude is currently priced in dollars. The head of the Saudi Arabian central bank has suggested things aren’t changing. He denied a report in the UK’s Independent newspaper that leading producers were planning to shift their pricing policy over the next nine years. But the argument for change to using a basket of currencies is compelling. Back in 1965, pricing oil in anything other than dollars would have been bizarre. The US produced 28 per cent of the world’s crude, more than the whole Middle East, according to statistics from oil major BP. And the US consumed 37 per cent of the world's total production – seven times more than either Germany or Japan, which were in second and third place. And around the world, the dollar was still almighty.

By 2008, everything had changed. The US’s share of oil production had dropped to 8 per cent, behind both Saudi Arabia and Russia. The nation still led the world in consumption. But not only has its share dropped to 23 per cent, the gap with the followers had narrowed: The eurozone was at 13 per cent and China at 10 per cent. And after years of all sorts of deficits, the dollar hardy seems like a long-term safe haven currency.

It is more a question of when than if the dollar and crude pricing will go their separate ways. Whenever the break comes, the US will lose out. The greenback would suffer from not being used to finance the working capital needed to trade and ship crude. If euros and renminbi are used instead of dollars, there will be a little less demand for the US currency. Also, it’s harder to do business in someone else’s currency. The price of oil paid by US buyers would probably vary more after it has to be translated from its non-dollar base. But the greatest damage would be psychological. Oil is the most important internationally traded commodity. For it to be traded in something other than dollars would be perceived as a sign of US relative decline. Quite rightly.