A note on the oil and dollar rollercoaster

October 7, 2014 |

As perhaps everyone has noticed, fuel prices are falling at the pump, and oil prices are falling in the trading pits in New York and around the world. Lots of factors are being cited — primarily falling demand, and the dismal European economy.

A common theme in the discussion – that falling oil prices signal a weakening economy — and that they could distract the public away from petroleum alternatives.

One factor to keep in mind — the fast-rising US dollar. For example, the yen has fallen 25 percent against the dollar since 2013, according to this chart from OANDA.



What does that have to do with oil prices? Crude oil trade is dollarized — which is to say, when the dollar get stronger, oil prices rise in other countries. In this case, a 25% surge in the dollar means that oil prices would climb 25% in Japan, as priced in yen, without a corresponding drop in the global oil price.

The US dollar is up 10 percent against the Euro this year, which means that oil prices would be rising 10 percent in the EU, unless the global oil price falls. And a 17 percent appreciation against the Australian dollar in the past 12 months.

All of which to say — falling energy prices do not necessarily mean that energy demand — at constant prices — dropping into oblivion and causing a threat to, say, global biofuels demand. What you are seeing is, mostly, a revaluing of global currencies — and given that oil is a global commodity but traded in dollars, the overall price is bound to drop to equalize supply and demand.

Certainly, the EU has a sputtering economy and that will weigh on demand and oil prices, and US gasoline demand (in the long term) may fall owing to more electrics, CNG and flex-fuel cars, and higher fuel economy.

But keep a perspective, always, on energy prices.

[Since posting this note, a reader adds: “My take is that your point portends a more ominous issue; that being that the economy has not recovered from 2008. My logic: 1) Reduced demand for motive energy means a) people are driving less and b) a lack of demand for commercial transport of goods; 2) The dollar is over-manipulated by the Fed’s quantitative easing; 3) The 10% on the dollar isn’t OUR strength, it’s the EU’s weakness. The Euro is tanking due to certain participants unwillingness to correct their socialist-over-spending.

“The results and forecast: 1) If we aren’t careful, we could be looking at Recession 2.0 or worse (Great Depression 2.0). 2) China has been buying gold by the Ocean Tanker. Watch them shove all of that into the middle of the poker table and back the Yuan (at least partially) with gold. Bye bye dollar, bye bye USA. Personally, if either happens, I hope the members of Congress are lined-up (both sides of the aisle) in front of firing squads (not figuratively). These politicians have known of this issue and warned repeatedly…. but remain cowards, due to the lack of term limits. Let’s hope this doesn’t unfold.”]

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