Surpluses won't move to other currencies because there are no good investments not denominated in us dollars (such as the us stock market) It's not just the currency, it's the opportunity set. Assets must match liabilities.
The US stock market is stretched. On a Market Cap to GDP basis, Buffett's favourite measure, the US market has never been so over bought. It's why Buffett has sold his Bank of America stake, most of his Apple stake, and why he is sitting on $325 billion cash at Berkshire. He can't find any good value investment opportunities.
Take it a step further. The 10 year treasury is yielding about 4.5%. That's a risk free investment at an equivalent valuation to a P/E of 22.2. So the question becomes this: why would you pay more than a P/E of 22.5 for a risky equity asset with a chance of capital loss if the market corrects? Yet the average P/E on the S&P500 is well above 22.5.
I know this is a simplistic argument, which can be attacked on many levels. But it highlights the point that the US market is not always superior. There have been many times in history when it ran too hot and burned out for a while (the dot.com boom, the sub-prime crisis, etc). So the question becomes, are we close to one of those times again?
There is no answer. It is just an academic debate. Everyone will have their own opinion. Only time will tell.
This is an interesting question and impossible to answer accurately because many of the agreements are between countries, the terms of which are politically driven and sometimes influenced by corruption, so are never crystal clear. However, estimates are that until recently at least 80% of oil transactions were settled in dollars (J.P. Morgan numbers published in Q4 of 2023), but that is already trending downwards with some commentators suggesting that it will soon be closer to 60%.
We must not lose sight of the fact that the U.S. today is a major oil producer itself. In 2018, the United States surpassed Russia and Saudi Arabia to become the world’s largest crude oil producer, despite the fact that several countries have larger total oil reserves. Canada is also a major player. As such, a reasonable percentage of the world's oil is always likely to be priced in US Dollars.
Here are the countries with the highest crude oil production based on barrels per day in 2024:
- United States: 17.7 million
- Russia: 11.2 million
- Saudi Arabia: 12.1 million
- Canada: 5.5 million
- Iraq: 4.5 million
- China, UAE and Iran, circa 4 million each
Brazil and Kuwait, circa 3 million each
Today, China, as a major oil importer, has pushed for greater use of its renminbi (yuan) currency in oil contracts with Russia and Iran. Some estimates suggest around 20% of global oil trade could involve the yuan by 2025.
Russia has demanded payment for its oil exports in rubles from "unfriendly" countries after sanctions imposed over the Ukraine invasion. While Russian "friendly" countries such as India have insisted that it will only buy Russian Oil in Indian Rupees, which is a smart move because the Russians are likely to reinvest the proceeds of sale back into India. In other words, India is trying to capture the economic benefits that the U.S. has enjoyed for half a century.
The United Arab Emirates and India have also agreed to settle some crude oil deliveries in Indian rupees instead of dollars.
So, other than the USD, major currencies now being used for oil pricing and trade include: Chinese yuan (renminbi), Russian ruble and the Indian rupee. Trades also settle in Euro, Turkish Lira and Yen, but these currencies are far less significant in the context of the oil market.
More broadly, Nikkei Asia reported in November 2023 that the Chinese yuan had become the fourth most popular currency in international settlements (not just oil), overtaking the Japanese yen.
So the big question is whether the economic benefits that accrued to the US for so long will migrate to China and India. If so, we could be on the cusp of asset market booms in both of those jurisdictions.
Surpluses won't move to other currencies because there are no good investments not denominated in us dollars (such as the us stock market) It's not just the currency, it's the opportunity set. Assets must match liabilities.
The US stock market is stretched. On a Market Cap to GDP basis, Buffett's favourite measure, the US market has never been so over bought. It's why Buffett has sold his Bank of America stake, most of his Apple stake, and why he is sitting on $325 billion cash at Berkshire. He can't find any good value investment opportunities.
Take it a step further. The 10 year treasury is yielding about 4.5%. That's a risk free investment at an equivalent valuation to a P/E of 22.2. So the question becomes this: why would you pay more than a P/E of 22.5 for a risky equity asset with a chance of capital loss if the market corrects? Yet the average P/E on the S&P500 is well above 22.5.
I know this is a simplistic argument, which can be attacked on many levels. But it highlights the point that the US market is not always superior. There have been many times in history when it ran too hot and burned out for a while (the dot.com boom, the sub-prime crisis, etc). So the question becomes, are we close to one of those times again?
There is no answer. It is just an academic debate. Everyone will have their own opinion. Only time will tell.
Thanks for that info. Definitely food for thought
Thank you for the article. Any idea on what % of the world’s oil is currently being settled with USD?
This is an interesting question and impossible to answer accurately because many of the agreements are between countries, the terms of which are politically driven and sometimes influenced by corruption, so are never crystal clear. However, estimates are that until recently at least 80% of oil transactions were settled in dollars (J.P. Morgan numbers published in Q4 of 2023), but that is already trending downwards with some commentators suggesting that it will soon be closer to 60%.
We must not lose sight of the fact that the U.S. today is a major oil producer itself. In 2018, the United States surpassed Russia and Saudi Arabia to become the world’s largest crude oil producer, despite the fact that several countries have larger total oil reserves. Canada is also a major player. As such, a reasonable percentage of the world's oil is always likely to be priced in US Dollars.
Here are the countries with the highest crude oil production based on barrels per day in 2024:
- United States: 17.7 million
- Russia: 11.2 million
- Saudi Arabia: 12.1 million
- Canada: 5.5 million
- Iraq: 4.5 million
- China, UAE and Iran, circa 4 million each
Brazil and Kuwait, circa 3 million each
Today, China, as a major oil importer, has pushed for greater use of its renminbi (yuan) currency in oil contracts with Russia and Iran. Some estimates suggest around 20% of global oil trade could involve the yuan by 2025.
Russia has demanded payment for its oil exports in rubles from "unfriendly" countries after sanctions imposed over the Ukraine invasion. While Russian "friendly" countries such as India have insisted that it will only buy Russian Oil in Indian Rupees, which is a smart move because the Russians are likely to reinvest the proceeds of sale back into India. In other words, India is trying to capture the economic benefits that the U.S. has enjoyed for half a century.
The United Arab Emirates and India have also agreed to settle some crude oil deliveries in Indian rupees instead of dollars.
So, other than the USD, major currencies now being used for oil pricing and trade include: Chinese yuan (renminbi), Russian ruble and the Indian rupee. Trades also settle in Euro, Turkish Lira and Yen, but these currencies are far less significant in the context of the oil market.
More broadly, Nikkei Asia reported in November 2023 that the Chinese yuan had become the fourth most popular currency in international settlements (not just oil), overtaking the Japanese yen.
So the big question is whether the economic benefits that accrued to the US for so long will migrate to China and India. If so, we could be on the cusp of asset market booms in both of those jurisdictions.
Food for thought.
Nice article