The Evolution Of The Oil-denominated Currencies And Its Impact On The International Monetary System Since The20th Century

In recent years, the sharp fluctuations about the price of oil bring many badeffects to the oil trade and the development of economy and finance. It attractednumerous scholars to research on this issue, major studying and analyzing the reasonsfor the changes of oil prices, the impact to the economy, the development of oilfinance and so on. With the deepening of research, more and more scholars realizedthe currency factor in the international oil trade; this makes more and more scholarsto study the oil pricing and settlement currency mechanism. Based on the basic studyof other scholars, this paper analyzes the history and the evolution of theoil-denominated currencies, focuses on the formation, the development and theimpact of oil dollar-denominated mechanism, and analyzes the vulnerability of oildollar-denominated mechanism and the impact of the international monetary system.Then uses the euro as an example to discuss the feasibility of single sovereigncurrency replaces the dollar to denominate oil, and discuss the impact of theinternational monetary system. Finally, I will introduce the main directions for reformof the oil-denominated currencies, namely, use establishing an innovationoil-denominated units and use ultra-sovereign currency to replace the current oildollar-denominated mechanism.Since the development of the oil industry, the history of the oil-denominatedcurrencies divides into three stages: The first, the coexistence of multipleoil-denominated currencies. The second, after the establishment of the Bretton Woodssystem, the U.S. dollar becomes the leading oil-denominated currency. The third,after the collapse of the Bretton Woods system, the dollar become the only currencycan denominate oil. The development process of the oil-denominated currency mechanism embodies the competition of economics and politics between the majordeveloped countries in different periods. The country who has the developedeconomics and the strong political power often promotes domestic currency to be thepricing and settlement currency for the international trade. And the countryestablishes its own hegemony in the international monetary system, so as to promotethe development of economics and improve the political influence. Since1973, theU.S. dollar became the only currency to denominate oil; it also laid hegemony in theinternational monetary system regardless of the dollar pegs or decoupling to gold.Although the oil dollar-denominated mechanism brings great benefits to the UnitedStates, but gradually shows lots of bad influence. The weaker dollar and theincreasing U.S. trade deficit makes the oil price to rise to a high level, not only beconducive to the healthy development of the international oil trade, but also made badeffect to the global exchange rate, reserve structure and value, liquidity, internationalcapital flow, balance of payments.Use dollar as oil-denominated currency is unstable. There’s more and morevoice which changes this system. This paper analyzes three different directions aboutreform. First, use the euro to replace dollar to denominate oil trade, this way cannotbe a fundamental solution to the drawbacks of a single sovereign currencydenominated oil, and the system is not stable. Second, set up innovationoil-denominated units will face the game for the interests of both sides; it’s difficultto coordinate the interests of both sides. Third, take SDR as a transition, and thenestablish super sovereign reserve currency to replace the current system. Althoughthis is a more feasible direction, but it involves many factors such as economics,politics, so this way is still very long and complicated.