THE IRANIAN GOVERNMENT has threatened several times to stop trading its oil for U.S. dollars. If that happens, what will be the effect? Even before the Iranian crisis began, some of the OPEC countries were murmuring about a possible shift away from dollars. Regardless of Iranian intentions, there may develop a trend to buy and sell more oil in other currencies. For most of OPEC, it has nothing to do with ideology. It's an attempt to find shelter from American inflation.
Because the dollar is the world's most widely used currency, and because the United States is the largest of markets for oil, the oil business around the world is generally carried on in dollars. Sellers quote their prices in dollars. Buyers in Japan and Germany pay dollars for oil from Kuwait and Libya. Those dollars may never enter the American economy, but shuttle back and forth through dollar accounts in banks in other countries.
Iran could presumably demand payment in pounds, or yen. Some of the OPECministers have spoken of pricing oil in what they call a basket of currencies -- an average that would give heavy weight to those, like the German mark and the Swiss franc, with low inflation rates.
Any movement away from dollars will have a certain psychological effect in a market where psychology is important.People's attitudes toward money depend heavily on past habits and on expectations of future stability. It is a field in which expectations can rapidly become self-fulfilling. If people think the dollar is going to remain strong, they will hold it in preference to other currencies -- and that keeps it strong. If they think it is going to depreciate, they sell -- making its value fall in relation to other currencies. If foreign oil should be denominated in other currencies, a fall in the dollar's value would mean automatic price increases to Americans.
The weaknesses of the dollar abroad are all related fundamentally to the high American rate of inflation. If the inflation rate were falling, political gestures like an Iranian boycott of dollars would have little effect and would not be likely to last long. The basic strength of the American economy, and the security that its huge financial markets offer depositors, would keep the oil business operating in dollars. The threat to the international standing of the dollar comes not from Iran, but from an inflation rate here that is exceeded, among the big industrial economies, only by the rates in Britain and Italy.
If the OPEC governments were to begin backing off dollars, that would be significant precisely because it would be a tactic of self-protection. If that happens, inflation here at home will have incited a foreign reaction that can only make inflation more severe.