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Are Oil Prices Rising or Is the Dollar Falling?
At mid-day, the NYT business section has headlines, one above the other, saying that the "Oil Hits Record" and "Dollar Reaches New Low Against Euro." While these are presented as distinct stories arguably they are the same story.
Imagine that the price of oil stayed constant in euros and the dollar fell by 4 percent against the euro (roughly what it has done over the last month, depending on the dates chosen.) Then we would expect that the price of oil would have increased by 4 percent in dollar terms. While the fall in the dollar against the euro and the rise in oil prices as measured in dollars have not been exactly the same, they are in the ballpark. In short, much of the recent rise in the price of oil for people in the United States is not actually oil prices rising worldwide, rather it is simply a case of the dollar declining in value against other currencies and also against commodities, such as oil.
--Dean Baker
COMMENTS (7)
Hasn't that been the case over the longer term as well? There have been some spikes, and some long-term trend, but the change in the price of oil over the past few years has been much smaller measured in a stable currency such as the Euro.
(I'm reminded a little of the old chestnut "Fog on Channel -- Continent Cut off.")
Posted by: paul | September 12, 2007 3:27 PM
I would bet that oil is rising in oil currencies.
Posted by: anony | September 12, 2007 5:20 PM
"Imagine that the price of oil stayed constant in euros and the dollar fell by 4 percent against the euro (roughly what it has done over the last month, depending on the dates chosen.) Then we would expect that the price of oil would have increased by 4 percent in dollar terms."
Well, 4.17* percent.... ((1 / (1 - 0.04)) - 1)
Posted by: digamma | September 12, 2007 7:15 PM
same as the trade deficit story.
Posted by: laughingsong | September 13, 2007 4:17 AM
The price of Oil in Euros is up 25% since January and has more than doubled in price since Jan. 2004. The price appreciation of oil in a trade weighted basket of foreign currencies is virtually the same. While there is an argument why USD weakness can mitigate the demand destrcution caused by higher oil prices, the run up in oil prices these past years is much more than a weak dollar story.
Posted by: Max | September 13, 2007 5:37 AM
Divide to DOW or NASDAQ in 2000 by either the Euro or Gold and the US stock market is not a good investment. After I did this I moved into China and Emerging Market funds and bought CD's denominated in Euro, AUS $, and others. These were my best moves in ecades.
Posted by: MUZHIK | September 13, 2007 8:24 AM
The fall of the dollar was inevitable. It is the only way to get the trade deficit down to size. The real problem was allowing the dollar to rise to the point that it made such a painful adjutsment necessary. This was the Clinton-Rubin high dollar policy. It felt good in the short-term (except for manufacturing workers), but just like tax cuts that lead to big budget deficits, it could not be sustained.
Posted by: san | April 8, 2008 1:53 AM