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.

[reader]

"IF" the biggest word in the dictionary.

[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.

[Richard Schweitzer]

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.

[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.

[Kristian Magnuson]

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.

[your_avid_investor]

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.

[User 179796]

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..!
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[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 !!!

[Ames Tiedeman]

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