Oil Would Be $65 if the Dollar Had Stayed Strong - AGI

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From the American Geological Institute [AGI]:

The chart above shows the spot market price of crude oil per barrel (BBL) in US dollars and in euros from 2001 to today. The price of oil has grown faster relative to the dollar than to the euro. Yet, a portion of the rise in oil prices is due to the fall of the value of the dollar. The graph also shows the number of barrels of crude oil per cost of an ounce of gold, demonstrating the parallel growth in commodity pricing.

If the US dollar had remained strong in the global economy, oil might, in theory, be around $65 per barrel. However, oil is priced in dollars, and oil prices continue to rise. The impact of increased oil prices can not be ignored in the US economy, and, in turn, can further weaken the dollar. Resource economics is a complex feedback loop where today’s resource boom is driven by many external factors. This complex system bears watching by all geoscientists.

Comments

[Ames Tiedeman:]

Very interesting chart.

2008 Apr 17 06:52 AM

[reader:]

"IF" the biggest word in the dictionary.

2008 Apr 17 08:16 AM

[User 154465:]

Well you all bought into going to war (for oil) when the rest of the world condemned the US’s unilateral invasion of Iraq. How did you guys ever think you were going to pay for the military incursion? Now you know, an economy shot to hell and a sinking dollar.

2008 Apr 17 08:33 AM

[R. Richard ...:]

Now lets do that with Corn, wheat, rice and soy. Then, Steel, iron, etc.

As always, there is NOT just ONE factor in play (the writer does not imply that, of course). But, investors ( and speculators) must watch not only "trends," but "convergences" as well.

2008 Apr 17 10:01 AM

[Rob Spooner:]

Very unlikely to be true. As the world's most profligate consumer of oil, the U.S. influences world consumption as a result of the price in its domestic currency. At $65, the U.S. would consume more oil and its increased demand would drive up the cost in euros and every other currency.

2008 Apr 17 11:09 AM

[Kristian Ma...:]

US consumption would not decrease by 2 fold if gas price was reduced from $3.50/gallon to $1.75/gallon. The relationship is not linearly dependent, so the assumption cannot be made that the US would drive up world oil consumption by an appreciable amount if gas prices where lower. I'll bet, realistically speaking, that US demand for oil has only dropped a negligible amount due the spike in prices...American's continue to love their oil and large SUV’s, and have proven they will continue to pay a premium for it.

2008 Apr 17 12:40 PM

[Dan Schmeidler:]

So which came first, the chicken or the egg? Considering the collapse of the US dollar (versus other currencies), we already know that (hence) oil is more expensive in dollars than in euros. Oil has also traded pretty much in parallel to gold in the chart's time span. So? I guess, I would have expected a different approach or different analysis (charts, etc.) to the argument that a stronger dollar means more stable commodity prices? Or, maybe I am just not getting this article. Sorry, no Kudos here.

2008 Apr 17 03:52 PM

[G. L. Turner:]

Monday, on CNBC, they had an analyst saying that this rise in commodity prices was in food now and that the 'next play' was to start specualting in meat futures...

We are witnessing an infathomable level of greed, from bush/cheney and their Texas Oil Buddies and hedge fund operators who are so caught up in their own greed that they are failing to see that they are killing the goose that has laid the golden eggs that they so covet!
(The top 50 hedge fund managers made $29 Billion last year...this is "money made on money"...financed and paid for by the working class...) Over the course of history, it has been these huge shifts of wealth from the working class to a few elitists that have caused riots and wars....the riots have started...soon the wars..!
Y

2008 Apr 17 04:47 PM

[Rob B:]

Since the price of oil is pegged to the dollar it does not matter if our currency weakens of strengthens relative to other currencies. The price of oil would still be $115. The weakening of the US dollar allows only allows other countries to pay less for oil.

If the dollar would double in value tomorrow versus all other currencies, and all other factors remain the same, oil would still be $115 dollars a barrel !!!

2008 Apr 17 10:46 PM

[Ames Tiedeman:]

I think in 36 months we are at 2.00 on the Euro. Oil will be north of $200.00

2008 Apr 22 08:58 PM

[Kristian Ma...:]

Good article:

Dollar devaluation creates several problems for the world oil industry. The US dollar is the currency of choice in global crude oil trade while consumers use local currencies to buy petroleum products. Oil producing countries receive their oil revenues in US dollars but use other currencies to buy goods and services from different nations. The situation becomes more serious for OPEC as a cohesive group: its members have different trade partners, a situation that makes the impact of dollar devaluation differ from one country to another. International oil companies sell their crude in US dollars while they operate around the world using local currencies to pay for wages, benefits, taxes, and various costs. Consumers in countries with non-dollar appreciating currencies enjoy cheap oil, while people in dollar-pegged countries pay a higher price for the same barrel of oil. Therefore, dollar devaluation affects world oil supply and demand.

Theoretically, dollar devaluation reduces drilling activities in areas where most of the costs are denominated in non-dollar appreciating currencies such as the North Sea. It also reduces drilling activities in the oil producing countries. Dollar depreciation reduces these countries’ purchasing power and increases domestic inflation levels, all other things being equal. Dollar devaluation increases demand for oil in countries with non-dollar appreciating currencies. It also increases demand for gasoline in the US as thousands of Americans spend their vacations at home instead of traveling to Europe where the cost of the vacation is at least 40% higher than three years ago. Regardless of OPEC decisions, dollar devaluation on its own may tighten supplies, increase demand and keep oil prices high for an extended period of time. The following sections explore these points in details.

Oil prices are at record levels only in dollar terms, but not in other currencies. Figure 1 illustrates the trend in daily oil prices in US dollars and euros since the introduction of the latter in 1999. It shows that while oil prices in dollars are near record levels, oil prices in euro are almost 25% lower than those that prevailed in the summer of 2000. Oil prices in dollars have been increasing since November 2003, while those in euros started to increase a few months later, in February 2004. However, oil prices in dollars have increased by 54%, while those in euros have increased by only 31%.

The euro replaced most major European currencies at the end of 2001. The only major world currency to have survived the euro is the UK sterling. Figure 2 illustrates the monthly trend in oil prices in US dollars and sterling since 1973. Although oil prices in sterling are not indicative of major changes in Europe in the last three decades, the figure shows that while US oil prices are near record, the UK’s oil prices are still well below the record of 1984. The current size of the gap between oil prices in dollars and those in sterling is the first since 1982.

2008 May 14 12:52 PM