Oil market structure, network effects and the choice of currenty for oil invoicing
OCCAS IONAL PAPER SER IES NO 77 / DECEMBER 2007
OIL MARKET STRUCTURE,
NETWORK EFFECTS AND
THE CHOICE OF CURRENCY
FOR OIL INVOICING
by Elitza Mileva and Nikolaus Siegfried
Date: 05 12, 2007 16:06:26;Format: (420.00 x 297.00 mm);Output Profile: SPOT IC300;Preflight: Failed!
In 2007 all ECB publications
feature a motif taken from the €20 banknote.
OCCAS IONAL PAPER SER IE S NO 77 / dECEmbER 2007
by Elitza Mileva and Nikolaus Siegfried 1
OIL mARKET STRUCTURE, NETWORK EFFECTS
ANd THE CHOICE OF CURRENCY FOR OIL INVOICING
This paper can be downloaded without charge from http : //www.ecb.europa.eu or from the Social Science Research Network
electronic library at http : //ssrn.com/abstract_id=1005940.
1 Fordham University, New York, and Thames River Capital, London, respectively. The paper was written while the first author was an intern in the European Central Bank's DG-International and European Relations and the second author
was an economist in the same DG. Nikolaus Siegfried, tel.: +44 7 814 735 547 : Elitza Mileva, 441 East Fordham Road, Bronx, New York 10458, United States; tel.: +1 917 957 9361; e-mail: Mileva@fordham.edu.
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ISSN 1607-1484 (print) ISSN 1725-6534 (online)
Occasional Paper No 77 December 2007
1 INTROdUCTION 6
2. THEORETICAL LITERATURE ON THE USE OF CURRENCIES IN INTERNATIONAL TRAdE 7
3 THE OIL mARKET 9
3.1 Overview of supply 9 3.2 The demand for oil 10 3.3 World oil trade flows 11 3.4 The spot, term and futures
4 CHOOSING A CURRENCY FOR OIL INVOICING - THE ROLE OF NETWORK EFFECTS 15
4.1 Network effects in the use of money 15
4.2 A model for oil invoicing 15 4.3 Steady states and the adoption
curve 17 4.4 Sensitivity analysis for the model
5 CONCLUSION 20
WORLd CRUdE OIL TRAdE FLOWS 24
4 ECB Occasional Paper No 77 December 2007
A recurring theme in recent years in the debate on the international role of currencies has been the possiblity of pricing oil in euro. This paper contributes to these debates by providing a detailed review of the empirical evidence regarding the market for crude oil and current oil...