Chris Cook, former director of the International Petroleum Exchange, has written at The Oil Drum and SeekingAlpha about his idea of using energy as a form of denomination for international trade. He argues that this is in fact already happening: “oil is not priced in dollars: dollars are priced in oil”.
The key elements:
“The concept is extremely simple, and it is that international trade should be denominated not in dollars, but in energy. Producers of energy, such as Russia and Iran may then-–in exchange for value received–issue Units redeemable either in electricity, or in “energy vector” fuels such as gasoline, heating oil, fuel oil and above all natural gas, which all have a fixed value denominated in energy.
“Global transactions will then take place within the framework of an International Energy Clearing Union subject to the collective guarantees of energy producer and consumer nations generally. Both energy creditor nations – such as Russia, Iran, the GCC and Norway – and energy debtor nations, such as the US, UK and EU would all pay an amount into a global “energy pool” in support of the guarantee. The resulting balances would be deployed in massive investment in new renewable energy infrastructure and energy efficiency savings.
“The US, which is the biggest energy debtor by far, could therefore be funded by the Pool in redeploying much of its increasingly baroque military expenditure not just into the “Green New Deal” proposed in the US, but also globally, in partnership with the immense UK and EU intellectual capital at the cutting edge of research and development.
Cook also says such a system could address the waste of hydrocarbons by countries rich in oil and gas:”Anyone who wishes to see the negative effects of gasoline available at 30 cents per gallon on the environment and on the quality of life, need only travel to Tehran.”
As several commenters several commenters point out there would be problems with redeeming such a ‘currency’, the difficulty of converting different types of energy, and the loss that conversions would incur.
Greg Mankiw says money has three purposes: “a medium of exchange; a unit of account; a store of value” and it appears Cook is largely concentrated on the second function: “…the key point I am making relates to the use of Energy as a Unit of Measure or Value Standard against which goods, services, fiat currencies, and new (Currency) units redeemable in energy use value, or land use value may be exchanged” he writes in response to one of these comments. He also uses the example of the Swiss WIR Bank – one of the largest examples of a “complementary currency” system; most are local.
It’s certainly an interesting concept; and Gregor in response posts a chart of the Dow’s progress against WTI over the past decade. One of the possible reasons for the apparently close correlation between the two, he writes, is the falling energy return on energy invested.
If energy costs to an economy are rising in nominal terms, and the quality of energy earnings (EROEI) is now also in steep decline, then we would want to look for signs that the aggregate profits of the entire economy are in decline. And the above chart of the DOW may be an expression of this phenomenon.
Update: You can read a lengthier post on this subject from my colleague Izabella Kaminsky at FT Alphaville. There is also a discussion on a similar theme – denominating oil in currencies other than dollars - in FT Alphaville’s Long Room (members only) which Chris Cook has contributed to.
