Dean,

Does a purchaser of oil that is 'priced in dollars' have to hold dollars to buy the oil? If so, then oil being priced in dollars does influence the value of the dollar since foreign nations have to always have to have a crapload of dollars on hand to buy the oil. This demand for dollars would prop up the value of the dollar to some degree. I have no idea of the magnitude of the prop up. Is this correct?

Ponzi,

if the transaction is actually carried through in dollars (again, it's a matter of convenience, it's not a law), then you would need to hold dollars to carry through the transaction. If you didn't already have dollars for some other purpose, you would need to acquire them on currency markets one second before you bought the oil. The seller would then hold the dollars, if they chose, or could dump them 1 second after the purchase. The impact of the transaction taking place in dollars on demand for dollars is very small.

Do transactions' tendencies to be carried out in dollars have any relation to the particular banks used to carry out the transactions?

I remember hearing one analysis of the economics of international trading, and one big interest was not just the supply, demand, and profits, but where the money actually hung out in the meantime.

Dean,

Re: "The silver lining for Europe is that oil is not actually rising in price, or at least not by much."

That seems incorrect. Please see the chart of oil price in euros on the second level of charts here http://www.washingtonpost.com/wp-dyn/content/graphic/2008/03/07/GR2008030700263.html?sid=ST2008030701096 Looks like oil in euros has increased 49.6% over the past 12 months (vs. 75.6% in dollars). That does seem like "much". Correct?

I'd like to draw people's attention to this presentation on commodities speculation, given to the World Bank - first link on the page. Focused on metals, but relevant perhaps.

http://www.venerosoassociates.net/

Thanks for the explanation Dean. On this...

The impact of the transaction taking place in dollars on demand for dollars is very small.

I still can't get past thinking even with the lightening quick exchanges there has to be a constant increased level of demand for dollars to allow for the constant trading in oil that, due to the large amounts, is not so small in impact.

However, on this one, I'll take your word for the negligibility of the impact.

Lower dollars also mean that we can close our trade gap if we just made stuff here to buy rather than importing everything from China. Maybe Americans should be more concerned about where the products they buy come from without feeling protectionist, just trying to do something about our deficit.

LJM:"Lower dollars also mean that we can close our trade gap if we just made stuff here to buy rather than importing everything from China."

If you look at the numbers, the US trade deficit is mostly due to oil and China - in that order (oil 60%, china 40%). And the US can't produce its own oil, while the Chinese won't let the Yuan rise fast. So most likely the devaluation won't have too much traction on the trade deficit. it'll just raise the dollar-price of oil and help raise inflation expectations (already up 30% from september), which will create a vicious circle. Investors will pile into commodities like oil as a safe haven, in turn raising the oil price even more and thus maintaining the trade deficit. If you take a look, the trade deficit hasn't budged for the past year, despite the devaluation.

I don't deny that it has helped export industries, but watch as oil and inflation both keep rising. Just saying.

This isn't directly about the effect on the US, but on other countries. Are there still countries whose currency isn't openly traded for whom a change in which currency oil is traded in will matter? I remember that as late as the 1980s, India had such a big problem getting US dollars (which I believe they needed mostly to buy oil) that ordinary citizens could legally get very few - so few that Indian would-be college students had a problem trying to pay US university application fees (about $25-30) because they couldn't get the US dollars to pay them. I think that problem is mostly gone for India, but are there still other countries for whom it is a problem?