Is there any validity to petrodollar theory?

Essence · Post by **Essence** » Sun Jul 20, 2014 11:50 pm

I consider myself somewhat decently smart about economics and whatnot, but I recently discovered this 'petrodollar' theory and I was amazed that I hadn't heard more about it. No one has time to learn everything, I guess -- so I thought I'd turn to the lot of you to give me your opinions on the worthiness of the Petrodollar as an explanation of US foreign policy and of the theory that it's all going to hell and probably going to take the economy (US and/or world) with it. Any takers?

(http://www.zerohedge.com/news/2013-05-2 ... lar-system)

Sam · Post by **Sam** » Mon Jul 21, 2014 2:22 am

I can't find a single non-crank source of information about that petrodollar theory. Even the wikipedia page is a mess of unsourced garbage.

Your linked article is basically a joke. The throwaway line about quantitative easing would be my favorite part, but then they end with this gem:

holy fuck are you serious wrote:Today however, with the major and massive changes of oil resource availability revealed by the shale energy revolution, rising global oil production capabilities, stagnating oil demand, and rising renewable energy supplies in all major developed countries, and the constantly declining role of oil in the economy, the Petrodollar System's days are surely numbered, like the notion that $100-oil prices are "normal".

The impact of this will be massive.

Yeah, no.

name_here · Post by **name_here** » Mon Jul 21, 2014 2:34 am

That's hysterical. The magic number for shale oil being viable is somewhere north of $100 per barrel, with some variance depending on which shale oil guys you ask

Username17 · Post by **Username17** » Mon Jul 21, 2014 6:59 am

The effect of petrodollars is to increase the amounts of dollars that countries that import oil (which is most of them, but not as many as you think) keep in reserves. If dollars were no longer used in oil trasactions and suddenly Euros were used instead, the immediate effect would be that people would take a bunch of dollars out of their vaults and buy Euros with them and put the Euros in their vaults. This would have the ultimate effect of forcing someone down the chain to buy American products with American Dollars instead of an equal amount of German Products with Euros. This would improve the economy in the United States at the direct cost of the economy in Europe (or China, or Russia, or wherever the fuck people had to get their new reserve currency).

The big risk of people dumping dollars would be that if they suddenly wanted to buy more stuff than Americans could supply, then after the United States hit full employment there would be inflation - an increase of prices and wages to soak up the remaining additional dollars.

In short: absolutely "worst case" scenario of a petrodollar collapse would be so great for the American people at the moment that Paul Krugman would jizz in his pants.

-Username17

Blade · Post by **Blade** » Mon Jul 21, 2014 10:56 am

It's much more nuanced and complex than that. Stuff are so intertwined that it's difficult to tell exactly what effect this would have.

What's sure is that it would cause at least some countries to sell their now useless dollars, causing dollar price to fall down, leading other countries to also sell them before it's too late.

This would make US exports far cheaper, but would make it far more expensive to buy oil. And since US economy is very dependent on oil, this would hurt the US economy. I don't know how it would turn out in the end, I guess good for some industries, bad for others.

But things are actually a bit more complicated. For example, China has a whole lot of dollars and US debt, so they wouldn't like seeing the dollar price fall down too low. And as much as Germany likes having an expensive euro, the rest of the EU isn't too fond of that, and even Germany would probably start to have problems if their products become too expensive.

Laertes · Post by **Laertes** » Mon Jul 21, 2014 1:13 pm

I remember reading in The Economist that one of the reasons for the dollar's strength is China buying up immense amounts of it deliberately as a way to keep her own currency from appreciating. Cheap yuan relative to the dollar means Chinese manufactured exports to the US do well, which is basically what China's economy relies upon. As such, it is not unreasonable to assume that if the dollar gets dumped then China will take up at least some of that slack to keep her economy afloat.

Stahlseele · Post by **Stahlseele** » Mon Jul 21, 2014 2:09 pm

Germany as a whole would face pretty big problems if our products became too expensive, because we are Exportweltmeister and thus very much reliant on exporting goods with the made in germany seal. The german people, on the other hand, buy precious little germany produced stuff themselves. mainly food and not much else. Most anything else is imported nowadays, if i remember that correctly.

tussock · Post by **tussock** » Mon Jul 21, 2014 2:14 pm

The worst case for the US of more US dollars back home would be the central bank putting interest through the roof to control inflation. Obviously inflation is the natural outcome, but that hurts people with giant piles of US dollar in the banks, so ... fuck the economy, fuck the unemployment, they're not going to let that happen.

Too stupid for words I suppose, but isn't that what always happens?

Blade · Post by **Blade** » Mon Jul 21, 2014 3:37 pm

@Laertes: Some people in China are starting to dislike the artificially low Yuan. First there's the middle class that wants European and American goods, and the low Yuan makes it very expensive for them. Second, some people are concerned that all that dollar, while good on the short term to boost exports, is a bad long-term investment that will leave the country poor when yuan finally rises and dollar, relatively, falls.

@Stahlseele: Germany's industrial strategy is to buy low-priced goods and work, and add some high quality work done in Germany and sell them, mostly in Europe.
So they need a high Euro to buy stuff cheap. They don't care if it makes it very expensive to sell outside Europe because they don't sell that much outside Europe to begin with, and even when they do, the "german quality" seal is worth the high price for most companies and end-users.

Username17 · Post by **Username17** » Mon Jul 21, 2014 7:04 pm

Blade wrote:
@Stahlseele: Germany's industrial strategy is to buy low-priced goods and work, and add some high quality work done in Germany and sell them, mostly in Europe.
So they need a high Euro to buy stuff cheap. They don't care if it makes it very expensive to sell outside Europe because they don't sell that much outside Europe to begin with, and even when they do, the "german quality" seal is worth the high price for most companies and end-users.

This is almost exactly wrong. The reason why Germany always opposes plans for a weaker Euro is because the Euro is already a weak Deutsche Mark. The Euro is in essence a compound currency of the DM and the Lyra. The Italian side drags the value down, and the German side pushes it up. By having a fixed exchange rate between them, the Italian side is in essence being stiffed with an expensive currency that hurts their exports while the German side is laughing it up with a cheap currency that benefits their exports.

Germany, and surrounding countries, really are shifting a huge amount of bank deposits around to keep the Euro lower than their supply and demand curve would put it in order to boost their domestic industries. They just aren't doing it enough to spread that benefit to Southern Europe because they are assholes.

Germany is doing currency manipulation on a grander scale than the Chinese to affect essentially exactly the same goal: having a favorable balance of trade, which they have. In any country without a fixed exchange rate, running a trade surplus of almost 3% of GDP would tend to strengthen your currency until the balance of payments balanced. In Germany, that doesn't fucking happen, because they let the depressed southern economies leak Euros onto the market to keep their currency from rising.

-Username17

Blade · Post by **Blade** » Tue Jul 22, 2014 9:00 am

Looks like it depends where you read your news. From what I've read, American economic newspaper say that Germany needs a weak euro because it's exporting stuff outside of the EU, French economic newspaper say that Germany needs a strong euro because it's exporting lots of stuff inside the EU and its trade outside EU is still big even with a strong euro.

Ancient History · Post by **Ancient History** » Tue Jul 22, 2014 9:49 am

If the Euro is strong, Germany's exports get more expensive, and demand for said exports will lower.

Username17 · Post by **Username17** » Tue Jul 22, 2014 9:50 am

Blade wrote:Looks like it depends where you read your news. From what I've read, American economic newspaper say that Germany needs a weak euro because it's exporting stuff outside of the EU, French economic newspaper say that Germany needs a strong euro because it's exporting lots of stuff inside the EU and its trade outside EU is still big even with a strong euro.

Well, if that's the French position, then the French position would be what is generally known as "retarded." Trade within the Eurozone is obviously unaffected by how strong or weak the Euro is, because there's no exchange rate. The price in France and Spain are denominated in the same currency - if the Euro suddenly became worth an order of magnitude more or less Dollars or Rubles, the prices of European goods in Europe would be unaffected.

Although to the extent that Germany's exports into the EU are affected by a strong or weak Euro, they are still benefited by a weak Euro, not a strong one. If the Euro is weak, that makes it more expensive for Italians and Belgians to buy American and Chinese goods, which makes German goods more attractive in comparison (even though as previously noted: the price of the German goods themselves are completely unaffected by exchange rates).

I can't read French newspapers, but if you are accurately reporting their arguments, their arguments fail even the most cursory of inspection. They literally have the signs backwards on that argument.

-Username17

Blade · Post by **Blade** » Tue Jul 22, 2014 10:29 am

From what I've read, the global idea is that Euro is relatively strong for some EU country, but still weak for Germany, because German products are higher quality, and higher quality products stay competitive with a higher price.

Germany has low costs. They import materials and energy cheaply thanks to the strong euro, they've slashed labor prices locally with internal political reforms but also by using a lot of external labor, mostly in eastern european countries, also payed with a strong euro.

So all this makes that the current strong Euro is good for Germany. And while a stronger euro would be bad, a weaker euro would make other European products more competitive compared to German products.

Username17 · Post by **Username17** » Tue Jul 22, 2014 11:07 am

No. A weaker Euro would not change the competitiveness of Italian products or Dutch products against German products. Because those countries have the same fucking currency. That entire argument makes no sense.

A weaker Euro would make Spanish and Maltese products more competitive against American and Chinese products, because those countries sell things in a different currency. Exchange rate changes only change things where there is an exchange that takes place. A stronger or weaker Dollar doesn't change the competitiveness of manufacturing in Montana to Florida because there isn't an exchange.

The Germans oppose a weakened Euro because their positive trade balance is already like 3% of GDP and there's pretty good evidence that they wouldn't be able to keep up with a higher demand for German products overseas. It's just that simple. The Euro is weak enough for German needs, and they oppose making it weak enough for Italian needs, and that's that. It doesn't get any more complicated than that.

-Username17