Comment by gls2ro
2 hours ago
Not an economist but the petrodollar concept helps the dollar because everybody that needs oil needs to buy dollars. You see it as small thing but it is fundamental thing because oil is used in so many places that as we have seen a disruption of 20% of it would start causing real problems on almost the entire world.
QED: oil powerful, only dollar buy oil, dollar stronger.
The use of dollars to purchase any commodity is a negligible fraction of demand for dollars.
What you should be looking at is investment demand for dollars, that is, in which currency does the seller store their surplus.
Think about it:
I need to buy a barrel of oil, but I am in Argentina. So I sell my pesos for dollars, I buy the oil with the dollar. The seller now has dollars, and sells the dollars for Swiss Francs and invests the money in swiss bonds.
Now, what happened? The global demand for dollars by the buyer was exactly offset by the seller. It is the seller that decides, by choosing where to store his surplus, of what currency is boosted by oil. And it is not the currency that oil is sold for, it is the currency that the proceeds are invested in.
So oil is completely irrelevant for the value of the dollar, what is relevant is that investors want to store their funds in the US capital markets. That's what matters, and it is investor preference to store their earnings in capital markets that determines why they want to denominate oil in dollars. It just saves on an extra transaction.
But focusing on the transactions misses the picture of the dollar's strength, because denominating oil in dollars is merely a consequence of the desirability of US capital markets as a destination for foreign capital. And that desirability drives everything else. It's not oil, it's deep, liquid capital markets with established foreign investor rights. That trumps everything else.
Think about it -- would you keep your earnings in a country with weak foreign investor rights or lack of financial transparency or illiquid markets where you couldn't easily pull your money out when you wanted to? That is much more important to the seller of the oil than anything else. It will drive what oil is priced in. And it will drive the demand for dollars.