Thursday, June 11, 2009

A Market Yen for Kiloliters

As mentioned in Oil 101, oil is traded in US dollars because it most efficient for everyone (consumers and producers) involved. Oil floats freely against the US dollar and all currencies. If the US dollar or other currencies weaken then oil prices rise in all those currencies. There is little economic reason for wholesale markets other than in US dollars.

Every once in while there is a suggestion to trade oil more often in Euro or other currencies. Trading oil in non-USD currencies makes comparing the price of oil across the world more difficult. If oil has risen by US$1 per barrel, how much should it have changed in Japanese Yen per kiloliter (the unit used on Japan's TOCOM exchange)? This may seem trivial but this causes an inefficiency which raises prices for Japanese consumers. The issue was discussed in the Wall Street Journal today:
"One of the reasons why oil around the world is traded not just in barrels, but in U.S. dollars per barrel, is because it allows the least amount of computation from one market to another," said Morgan Downey....author of 'Oil 101,' a book about the oil industry." (WSJ)