With all the talk about the collapse or eventual replacement of the US dollar, there’s a lot of buzz about an idea to create a new, global currency based on oil. Yes, oil.
The idea, floated by Chris Cook, the former director of the International Petroleum Exchange, would effectively reverse the current order. Rather than quoting oil in terms of dollars, we’d be trading dollars redeemable for some X-amount of oil.
Part of the motivation for it is environmental. Big oil importers like the US would inherently be debtors into the global currency be pool, creating a big incentive to reduce the use of oil.
We hate to bust anyone’s bubble, but this is not only a non-starter, but a bad idea.
For one thing, a currency has to be based on trust. That’s the essence of any legal tender. Right now, for all its faults, the US has built up an enormous reservoir of trust. Nobody else comes close to our track record, which is why China keeps buying Treasuries and other US denominated assets, despite being overexposed to them. Can anyone say with a straight face that a currency controlled by a global IMF or UN-like body, with implicit favoritism towards Iran or Russia would be more trustworthy? Seriously, we’d love to hear you say that.
It’s arbitrary. Why must oil be the underlying unit of economic trade? Some things are really oil intensive, others are not. How about a currency based on CPU cycles? Yes, arbitrary.
Oil’s significance is declining. As suggested above, oil is not as important to the economy as it used to be. More and more business is conducted electronically, with negligible impact or use of hard/dirty energy. Sure, oil remains extremely important and it’s premature to call it’s death. Way premature. But it’s significance is declining. Why would we have a declining commodity underpin our exchange.
Ultimately, the big one is trust. We’d trust currency issued by the US government over a global currency tied to a global body and various petro states any day of the weak. And we’ve been really negative about what the government is doing to the dollar.
So, fun point to debate. Totally unrealistic, or even ideal.