67. Oil-to Dollar? Oil-to Basket of Currencies?

Glenn Beck tried to make a possible switch of oil-pegged-to-the-dollar to oil-pegged-to-a-basket-of-currencies a negative thing for America. I’m no economist. But here is my thinking? Am I wrong?

Dollar-Oil Relationship (today) – Oil MUST be bought/sold in dollars

(Dollar-to-Oil Relationship) - If the dollar strengthens then more oil can be bought for a dollar; conversely, if the dollar weakens, it takes more dollars to buy the same amount of oil.

However, a reverse relationship (Oil-to-Dollar Relationship) also exists. If oil stability (inventory) is disrupted (war, cartels, terrorists, supply itself), the price of oil goes up and drives the dollar down. If oil inventories look better, supply & demand drives the price of oil down; hence, to keep oil profits stable the dollar must raise.

Possible future – Oil tied to a basket of currencies other than the dollar.

If the dollar is removed from its direct connection to the commodity oil, how is the dollar affected then?

One could expect the same relationships as before, but now for the basket of currencies, when they become tied to oil, with some exceptions. Whereas the dollar’s strength/weakness can be affected by something other than oil, each currency in the basket can also. However, the basket, or diversification of currencies, will be designed to average out -- in other words, to remain stable and about the same. Thus, the Basket-to-Oil relationship should be more stable and keep oil prices more consistent. How about the reverse relationship, i.e., Oil-to-Basket? An unstable Oil inventory will now affect the Basket of currencies like it did the dollar. But, instead of impacting a single dollar currency, say 10%, each of the currencies in the basket will only be affected by 10%/number of currencies in basket. Very simplified example and not specifically accurate in that each is an equal share. But, it demonstrates the point that no single currency in the basket will be affected like a single dollar was and the economies dependent on those currencies won’t be affected as much.

OK. Assume the dollar is now outside the relationship. However, we will need to buy oil in one of the currencies in the basket. How does the dollar-to-euro look (or one of the other currencies)? Are we weaker or stronger than the Euro? If our dollar is no longer pegged to oil, that for years has been an unstable commodity that weakened our dollar, will our dollar become stronger? Good question? I personally believe our dollar will become more stable. Our stability should then become more accepted by world countries wanting to invest in America. Would that not boost our economy? So, I say go ahead and peg oil to a basket of currencies.

I suppose I need to check out a detailed economics book detailing the dollar to commodity relationships and the dollars importance in the world before drawing any final conclusions. What do you think about a new oil-to-basket of currencies scenario? Am I way off target? Just trying to use my Common Scents.