With few exceptions, oil is priced in dollars, even when it is produced in countries with diverse economies and major currencies, rather than petrostates with little going on except oil production.
In the latter case, oil that was priced in the local currency would leave it subject to unpredictable swings in response to global oil prices and the output of the country in question.
As it is, a great deal of oil is produced in countries with little to underpin their economies besides oil, so pricing the black stuff in an international currency makes sense, especially when that currency is that of the primary buyer of the oil concerned. It makes things simple for the buyer and lets the seller take its revenue in a major currency.
The situation of primary buyer of the world's oil is the situation the US has found itself in for quite a few decades now, and in fact the US remains the single largest oil consuming nation. So the fact that oil is priced in dollars is unsurprising.
The result is that virtually every country in the world needs to hold dollars in order to buy oil on the world market. The same goes for large commercial oil buyers. This need for dollars has been a big factor in conferring the premium on the dollar that it has long enjoyed, but is now in the process of losing.
The eurozone economies considered as a whole come a close second to the US in oil consumption, but China probably could tear past both in the coming years.
With the dollar slipping downhill, there is a case for sales to be made in another currency, the most obvious candidate being the euro. Although the oil price moves with the dollar, there is now an unhelpful amount of uncertainty about the nominal price.
Indeed, oil's approach to within spitting distance of the psychologically huge $100 a barrel mark, although underwritten by extremely firm global demand, is as much about the falling dollar as it is about geopolitical uncertainty. Viewed in euros, the real oil price looks much less scary.
Pricing in euros should make no odds to most of the world's big oil buyers. And once that switch is made, why not follow suit for the other commodities? Perhaps initially to euros, but then to renminbi as China becomes the biggest buyer of pretty much everything and the renminbi becomes a free-floating international currency.
Iran already sells oil in euros and is leading a push for wider adoption within OPEC. Iran was also planning to set up a euro-denominated oil bourse, although all seems to have gone suspiciously quiet on this front of late. However there is no reason why the idea couldn't be revived. And if the cause of euro oil sales is taken up by a country less reviled than Iran, then it could see wider adoption.
Venezuela is also an advocate, but like Iran, is not well respected internationally. Saudi Arabia is against any move away from the dollar given its close alignment with the US, as well as its large dollar reserves, the value of which will be hurt by a move away from dollar oil sales. Looking outside the Gulf, Russia seems like another large producer that might have little reluctance to start selling oil in euros.
Tied up with this is the issue of the numerous petrostates that peg their local currencies to the dollar. The Kuwaitis have already abandoned their dollar peg in favour of a trade weighted basket that includes the euro in a significant way, and their Gulf neighbours will likely go the same way eventually. Once this is the case, then the logical next step is to sell some oil in euros.
Looking to what this means -- even with the base metals complex taking a nasty knock this week, the ongoing degradation of the dollar will assure the gold market of a lively time. And the ongoing shift in the balance of economic power in favour of Asia means that the base metals look pretty decent in the long term. The probable end of dollar oil pricing is just one more dollar bearish factor among many.
