So let’s say the U.S. is really not importing much Arab oil anymore,” says Erik Townsend in a thought experiment. “Well, if that were the case, it’s really hard to see why the Arabs would continue to price their oil in dollars, especially at that point; their biggest customers would be China and Brazil and countries that have no reason to deal in dollars.”
We’re in debt to Mr. Townsend for helping us tease out the petrodollar’s endgame here. Erik parlayed the fortune from his first career as a software entrepreneur into a second career as a hedge fund manager who knows the oil futures market inside out.
Think about it, he says: Where’s the incentive to keep pricing oil in dollars and maintaining large dollar reserves if the U.S. is no longer your biggest customer?
This is something everybody is watching because the deal made years ago to price oil in dollars has been a huge support to dollar demand around the world. If demand for the dollar drops while supply keeps increasing the result will be obvious.
Some think this event will take some time. Others are looking for it as early as later this year. note: Thanks to a blog reader here for sending us the link to this article.