Oil and The Dollar
by Hiland Doolittle
Oil & The Dollar 101
Oil is up. The dollar is down. The dollar is up. Oil is down. Why do oil price fluctuations impact the dollar so severely?
The devaluation of the dollar sends ripples through the oil industry. In the world of crude oil trade, the dollar is the currency of choice. Nations that produce crude oil are paid in US dollars. These oil-producing countries then purchase various goods and services from other countries in that nation’s local currency.
Members of OPEC have various trade partners. The dollar devaluation directly impacts the producing nation’s purchase power within that local economy.
International companies sell their crude oil in US dollars. However, their operating costs are paid in the local currency of the economy in which they are operating. So, expenses like wages, taxes, employee benefits and other normal overhead expenses are met using the local currency.
In countries where the dollar is not appreciating, oil prices are relatively low, while prices in dollar-pegged economies rise as the dollar turns down. Therefore, the value of the dollar greatly affects the supply and demand of world oil.
The Ripple
In those regions like the North Sea, where the costs of goods are paid in currencies that rise with the lowering of the dollar, oil drilling is reduced as the dollar turns down. Basically, in all countries where dollar depreciation reduces the economy’s purchasing power, oil-drilling activities will be reduced.
As the economy’s purchasing power is reduced, dollar depreciation increases an economy’s propensity for inflation. The depreciation serves to increase demand for oil products in countries that benefit from the lower dollar. As Americans face higher expenses abroad, Americans stay closer to home and local travel elevates, increasing the demand for gasoline in the U.S.
While media sources portray oil process to be determined by OPEC summits and agreements, the central determining factor in the price of oil remains the dollar. The lower dollar tightens supply as demand increases.
Oil Halts Rise
In January this year, oil was trading at $32.70 per barrel. Recently, oil was mired in the $60 range. In ten days, oil prices have surged crossing the $70 barrier.
On Thursday, the dollar mounted a surge against a basket of major currencies. The US economy celebrated an improved employment report and an encouraging retail sales report as well as a better-than-expected auction of 30-year Treasury bonds as the dollar rose 0.3% against the yen, closing at 97.96 yen.
The stronger dollar halted the recent oil rally. US crude oil futures fell nearly 2 percent and were continuing the slide in early Friday trading. Prices fluctuated but continued to flirt with the seven month high. Economists project oil to close in the $74-$75 range by the end of the month. In July 2008, oil hit the record high of $147 a barrel.
As President Obama moved through the Middle East, he attempted to assure Saudi Arabia and King Abdullah that there would be continued demand for oil in the U.S. In light of Obama’s green energy incentive programs, the Saudis have expressed concerns about decreased demand.
Overall market conditions remain volatile. In early trading activity, signs pointed to weekend profit taking.
Tags: 2009 Stimulus Package, Crude Oil, dollar, ECB, Economy, Euro, forex, Forex Commentary, GDP, japaneese yen, Japanese Yen, recession, US Dollar, US Retail Sales
About the Author - Hiland Doolittle
Hiland is a professional writer with extensive entrepreneurial experience. He is a graduate of St. George’s School Newport, RI and the State University of New York at Albany where he majored in history. He has been active in the real estate business for 30 years and has founded and sold several businesses.
Hiland currently writes for several financial sites and is a published author of the novel The Last Parade. He has recently completed a manuscript for a children’s book entitled Sami and The Minnow Man.
