Oil market structure, network effects and the choice of currency for oil invoicing
AbstractCrude oil is a homogeneous good traded on specialised exchanges and quoted and invoiced predominantly in US dollars. Despite the strong case for the use of the US dollar as a vehicle currency in the oil trade, we provide an alternative view. We develop a simple network effects model to identify the conditions under which either a complete switch in the oil invoicing currency or parallel invoicing in different currencies is possible and economically sensible. We calibrate the model using low actual values for the transaction costs of using euro and/or US dollars, as well as a proxy for information costs, which decline with the increase in the use of the new currency. The results show that there will be a switch to parallel invoicing in both currencies when two conditions are met: first, oil exporters expect that a certain minimum number of other oil exporters will also start using the new currency; and second, the information costs associated with quoting oil contracts in two currencies are low.
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Bibliographic InfoArticle provided by Elsevier in its journal Energy Policy.
Volume (Year): 44 (2012)
Issue (Month): C ()
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Web page: http://www.elsevier.com/locate/enpol
Trade invoicing; Network effects; Oil trade;
Other versions of this item:
- Elitza Mileva & Nikolaus Siegfried, 2007. "Oil market structure, network effects and the choice of currency for oil invoicing," Occasional Paper Series 77, European Central Bank.
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- Filip Novotný, 2012. "The Link Between The Brent Crude Oil Price And The Us Dollar Exchange Rate," Prague Economic Papers, University of Economics, Prague, vol. 2012(2), pages 220-232.
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