How Do Oil Prices Compare in Other Currencies?

Some of the explanations for the dollar jump rely upon the perceived weakness in the dollar's value (and hence, by extension, Fed policy). Does this make sense?

As I've remarked before [1], there is likely a two way causality between the dollar's value and the price of oil denominated in dollars. One way of taking out some of the numeraire issue is to see how a price of a barrel of oil would be, expressed in other currencies. In the figure below, I compare the dollar price against that in euros, and against that in the Special Drawing Rights [SDR].

Figure 1: Price ber barrel of oil (WTI), in USD (blue), in SDR (red), and in EUR (green). Squares indicate values for June 6. NBER defined recession dates shaded gray. Sources: St. Louis Fed FREDII; IMF International Financial Statistics; Pacific Exchange Services; and author's calculations.

The weights for the USD, EUR, JPY and GBP in the SDR are 0.44, 0.34, 0.11 and 0.11, respectively.

What the figure highlights is that while USD weakness is associated with higher dollar prices for oil, upward trends in all prices are evident. The wedge between the dollar increase and the SDR increase since January 2008 to 6/6 is only 2.8% (in log terms; 4.2% in level terms). It's a bit bigger for the dollar/euro comparison, at 6.7% (in log terms; 9.6% in level terms)

So the dollar's exchange rate "matters" (keeping in mind two-way causality), but for the bulk of the movement in oil prices, look here.

Comments

[rainman]

Oil is already the new born hard currency, the best substitute for the faking dollar.

2008 Jun 08 02:18 AM

[Steven Ward]

After seeing this chart oil maybe the best substitute for the EURO as well. This smacks of a real demand/ supply situation and a currency crisis worldwide that will result in higher interest rates. That means CRUNCH, worldwide. China will have to stop subsidies of petroleum products sooner than it wants to do.

2008 Jun 08 03:03 PM

[jjason]

Menzie,
The link you gave does not explain what is happening in the oil futures markets. Better articles on speculation in oil futures markets are by Phil Davis, William Eichler and Anthony Schneider... on SeekingAlpha.

Follow the links in Anthony's article to download the testimony of Michael Greenberger titled "Energy Market Manipulation and Federal Enforcement Regimes" that was given to the US Senate on June 3, 2008.

It is imperative that people take the time to learn how NYMEX, ICE, Goldman, Morgan Stanley and others around the world are involved in an "Enron like" price fixing scheme in all commodities futures contracts. Rep Bart Stupak and other members in Congress are looking into this problem. Michael Greenberger's report explains how the price fixing can be stopped.

2008 Jun 09 05:34 PM

[WillyW]

Prof Menzie,
I linked your chart in my italian blog (go-willywonka.blogspot... i agree with your analysis.
I think it's impossible today to give a forecast for oil market (will be a new law against Master's index speculators?).

2008 Jun 14 10:48 AM