How Big of an Impact Has the Falling Dollar Had on the Price of Oil?

OPEC’s starting to tick me off. First they say they are ‘unhappy’ about high oil prices. Then, reported recently that OPEC’s President is predicting oil to go to $170 per barrel by the end of the year:

OPEC President Chakib Khelil predicted that the price of oil will climb to $170 a barrel before the end of the year, citing the dollar’s decline and political conflicts.

“Oil prices are expected to reach $170 as demand for fuel is growing in the U.S. during the summer period and the dollar continues to weaken against the euro,” Khelil said today in a telephone interview. The leader of the Organization of Petroleum Exporting Countries also serves as Algeria’s oil minister.

I’m skeptical of this assertion because oil is up over 54% so far this year, while the dollar is down about 7.5% against the Euro. Unless I’m not understanding exchange rates, the dollar’s fall can only be attributed to a 7.5% rise in the price of oil. The rest is either due to supply and demand or speculation (though as Meg wrote this morning, that might not be the case). I doubt that the Fed will continue to allow the dollar to fall. I’m also skeptical of Khelil’s claim of rising demand in the U.S. throughout the summer. I bet we’ll see a drop in demand as some people just can’t afford to drive anywhere.

It bugs me when these guys come out and say stuff like this. It almost seems to be a self-fulfilling prophecy.

8 thoughts on “How Big of an Impact Has the Falling Dollar Had on the Price of Oil?”

  1. The dollar plunge has had a huge impact on oil, granted. The FED is between a rock and a hard place: raise interest rates and bolster the dollar (oil comes down) or keep rates where they are (better for Republicans in an election year). Rates go up, the market goes down, Republicans get all freaky, McCain tanks. Now, ordinary Americans might do better, but ordinary Americans don’t appoint the FED governors.

    As Jim Cramer says, this is a country by and for Corporations.

    There’s always a bull market (as Cramer is oft to say), but these days it’s in cash. They need it, we have it, and we won’t give it to them unless they pay us a lot.

    If you don’t have cash today, you are (in a word) bucked. Substitute “f” for “b” and you get my drift.



  2. The latest comments of OPEC president ticked me off too. First Saudi Arabia said there is no shortage of oil and no reason for high prices, then Libia say they might cut production because “the world is well supplied”, and now the OPEC president is predicting oil will go to $170.

    I wonder if OPEC president or Libia’s trade in oil futures. Imagine if what you say you know will affect the market. You can make a fortune without effort. In the US analysts aren’t supposed to trade based on their own insider knowledge – does it apply to predictions too? – but I don’t think anybody would prevent OPEC president’s trading in futures. I am just curious about it.

    We just saw a drop in demand in the US. I am working from home this whole week, and a ride to/from work costs me only about $4 in gas. But why not save it? I’d imagine anybody who can work from home does it now.

  3. I don’t think you should compare the value of the dollar to the Euro to understand what impact it has had on the price of oil, I would think change in the price of gold or some other comodity would be a fairer comparison.

  4. I read that for every 1% decline in the dollar, oil rises by $4. So 7.5% would add $30 to a barrel of oil. The rest of the increase is due to supply and demand, which OPEC is a part of and the emerging markets are the other part of. Speculators have little to do with it, they are just investor’s buying/selling and all the oil is clearing the market – no one is holding on to it to create a shortage and inflate the prices.

    You say, “I doubt that the Fed will continue to allow the dollar to fall”, but what can they do? The only way to stop the weakening dollar is to increase the interest rates above inflation, which is actually running about 8%. If the Fed did that, we would have a severe recession and congress would have to drastically cut spending. It would be a career ending decision by Ben Bernake and many others.

  5. I don’t see that oil can sustain these price levels in the long term. Consumption is already dropping off in the US, even though there might be a temporary increase during the summer. $4/gallon seems to gotten everyone’s attention, and all the talk is about gas mileage, telecommuting, alternative work schedules, public transportation, and alternative fuels.

    I think this will lead to substantial demand destruction, just as it did during the late 70’s and early 80’s. Also, when R&D catches up there will be several alternatives to petroleum developed that will moderate the need for additional imports.

    The weak dollar has certainly aggravated the cost of oil, and a stronger dollar will reduce it some, but I think that conservation and alternative fuels will do more in the long run.

  6. Oh, and as a reply to Bozo above, low interest rates from the Fed have more to do with averting the anticipated recession and counteracting the sub prime mortgage fiasco than of helping the McCain candidacy.

    Averting recession and mortgage foreclosures are good for the ordinary Americans that you champion. Helping corporations is likewise good for ordinary Americans since many of us work for those corporations or have our retirements savings invested in their stock.

    Of course, if your world view is filtered through the lens of Jim Cramer, then paranoia, conspiracy theories, and a persecution complex are probably inevitable. In which case you are bucked.

  7. I agree with you about the self-fulfilling prophecy. The president of OPEC is the ultimate insider so of course investors will follow his orders.

    Besides this can’t be an issue of supply and demand. Production is increased as demand increases. Oil companies don’t pull everything out of the ground today because there’s not enough storage space for it, plus storage costs money. So they produce based on consumption needs, therefore the price oil can’t be due to supply and demand.

    Then you hear the argument that it’s an issue of capacity, Why? Reaching capacity is at some future point that know one can predict, except at refineries. Shouldn’t the price of oil go up only once you reach or near capacity or when oil reserves are decreasing.

    Oil companies what a slow steady growing supply of oil over time so that prices go up and supply will last farther out into the future. If they pull too much oil from the ground now, prices will come down and supply will be used up sooner.

  8. These countries that seem to hate the US are certainly not going to stop raking in profit when they have us hurting as much as the media frenzy professes that we are.

    Why would a supplier drop the price of a commodity if he could sell the same amount for more money? It just doesn’t make sense.

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