IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Oil market structure, network effects and the choice of currency for oil invoicing

Listed author(s):
  • Mileva, Elitza
  • Siegfried, Nikolaus

Crude 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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.sciencedirect.com/science/article/pii/S0301421512000985
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Elsevier in its journal Energy Policy.

Volume (Year): 44 (2012)
Issue (Month): C ()
Pages: 385-394

as
in new window

Handle: RePEc:eee:enepol:v:44:y:2012:i:c:p:385-394
DOI: 10.1016/j.enpol.2012.02.002
Contact details of provider: Web page: http://www.elsevier.com/locate/enpol

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as
in new window


  1. Farrell, Joseph & Saloner, Garth, 1986. "Installed Base and Compatibility: Innovation, Product Preannouncements, and Predation," American Economic Review, American Economic Association, vol. 76(5), pages 940-955, December.
  2. Krugman, Paul, 1980. "Vehicle Currencies and the Structure of International Exchange," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(3), pages 513-526, August.
  3. Bamberg,James, 2000. "British Petroleum and Global Oil 1950–1975," Cambridge Books, Cambridge University Press, number 9780521259514, October.
  4. Hélène Rey, 2001. "International Trade and Currency Exchange," Review of Economic Studies, Oxford University Press, vol. 68(2), pages 443-464.
  5. De Santis, Roberto A., 2003. "Crude oil price fluctuations and Saudi Arabia's behaviour," Energy Economics, Elsevier, vol. 25(2), pages 155-173, March.
  6. Nienke Oomes, 2003. "Network Externalities and Dollarization Hysteresis; The Case of Russia," IMF Working Papers 03/96, International Monetary Fund.
  7. A.F Alhajji & David Huettner, 2000. "OPEC and World Crude Oil Markets from 1973 to 1994: Cartel, Oligopoly, or Competitive?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 31-60.
  8. Farrell, Joseph & Klemperer, Paul, 2007. "Coordination and Lock-In: Competition with Switching Costs and Network Effects," Handbook of Industrial Organization, Elsevier.
  9. Hartmann,Philipp, 2007. "Currency Competition and Foreign Exchange Markets," Cambridge Books, Cambridge University Press, number 9780521046930, October.
  10. Griffin, James M, 1985. "OPEC Behavior: A Test of Alternative Hypotheses," American Economic Review, American Economic Association, vol. 75(5), pages 954-963, December.
  11. Goldberg, Linda S. & Tille, Cédric, 2008. "Vehicle currency use in international trade," Journal of International Economics, Elsevier, vol. 76(2), pages 177-192, December.
  12. Bamberg,James, 2000. "British Petroleum and Global Oil 1950–1975," Cambridge Books, Cambridge University Press, number 9780521785150, September.
  13. Lotz, Sebastien & Rocheteau, Guillaume, 2002. "On the Launching of a New Currency," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(3), pages 563-588, August.
  14. Oz Shy, 2011. "A Short Survey of Network Economics," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 38(2), pages 119-149, March.
  15. Kiyotaki, Nobuhiro & Wright, Randall, 1991. "A contribution to the pure theory of money," Journal of Economic Theory, Elsevier, vol. 53(2), pages 215-235, April.
  16. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-954, August.
  17. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
  18. Kiyotaki, Nobuhiro & Wright, Randall, 1993. "A Search-Theoretic Approach to Monetary Economics," American Economic Review, American Economic Association, vol. 83(1), pages 63-77, March.
  19. George Selgin, 2003. "Adaptive Learning and the Transition to Fiat Money," Economic Journal, Royal Economic Society, vol. 113(484), pages 147-165, January.
  20. McKinnon, Ronald I., 1979. "Money in International Exchange: The Convertible Currency System," OUP Catalogue, Oxford University Press, number 9780195024098.
  21. Morris A. Adelman, 1993. "Modelling World Oil Supply," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 1-32.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:eee:enepol:v:44:y:2012:i:c:p:385-394. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.