Because of this, I may have misused the term “dollar reserve” in a technical sense. Perhaps it would be more accurate to say that whenever an oil transaction takes place, a dollar transaction must preceed it. Some nations (Japan for instance) hold large dollar reserves, while some will buy dollars as and when they need to buy oil.

Both of these mechanisms artifically inflate the dollar, however.

Rather annoyingly, the article upon which I based much my view on this issue appears to have disappeared from the internet. It was an interview with Sheikh Ahmad Fahd al-Sabah (Kuwaiti Oil Minister and President of OPEC) back in 2005 (I think) in which he stated — I’ve paraphrased from memory — the above.

I myself had always been under the impression that while oil might be priced in dollars, it could be traded in whatever currency the two parties agreed upon. Sheikh Ahmad Fahd al-Sabah’s point however, was that OPEC nations only accept payment in dollars. So Japan cannot buy oil from Saudi Arabia with Yen. It must first purchase dollars (using either goods, services, or Yen).

As I say I’m not an economist, and I’m willing to be corrected on this. But as I understand currency markets, the fact that an ongoing market for dollars is guaranteed amongst oil importers (those who import from OPEC at least) will help support the strength of the dollar as a currency.

If this is not the case, then I’d be interested to know why not?

Er, no; it might have in the 1950s under Bretton Woods, but as anyone can buy as many dollars as anyone else will sell them , as and when required, instantly, this is not so.

The transmission mechanism is actually how much the oil-exporting states import from a) the dollar zone and b) the euro zone respectively. Consider the simple case, in which we have one oil exporter, two importers (dollarland and euroland), and three goods (oil, dollarstuff and eurostuff). The exporter receives dollars from the two importers; assuming they import from the two stuff-exporters equally, they have to convert half of them into euros.

If they were to receive euros instead they’d have to convert half of them to dollars; the aggregate demand for each currency attributable to oil revenues would be the same. It would change if the oil exporter chose to buy more eurostuff or dollarstuff.

So not only is the oil price being artifically inflated by the slide of the dollar, but the extent of the dollar’s slide is being artifically kept in check by the global oil trade.