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Dollar, Euro and the price of Oil

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  • #1

    Dollar, Euro and the price of Oil

    just looking at some old graphs and well it seems that we are not getting shafted that much here in Euroland with the "record" oil prices... yes they are high for us as well but if you look at this old graph



    in 2000 oil was about 30$ and 30€ per barrel which kept parity and the level until roughly 2003, so all the way through the last recession... however as the oil price started to grow, dollar started to fall vs Euro creating a difference
    so that at the end of that graph in 2004 oil was at $50 ber barrel, and at €40... so US got hit by about 20% more for consumed oil... now fast forward to 2008 and
    Oil is 100$ per barrel, but at 1.5 exchange rate we in Euroland are paying comparatively "low" 65€ per barrel... so while for US the price rose 100% in last 4 years for us it rose "merely" 65%... which is considerably less... looking at the 6 year period since the last parity in Oct 2002 at around 27$/€ difference is even more staggering... ~ 270% increase in US vs ~ 140% increase in EU, and the divergence is set to continue by the looks of it... OK inflation ate some of it, but the difference is quite stunning during this relatively short period of time...

    so while we here are not carrying as much of this oil hit as US accross the pond... and now there is this
    MEED |
    http://www.meed.com/news/2008/02/opec_considers_switch_to_euro_pricing.html



    Opec secretary general Abdalla El-Badri tells MEED in an exclusive interview that the producers' cartel may switch to the euro within a decade to combat the dollar's decline.

    Opec has rekindled talk of switching the pricing of oil to the euro from the dollar, because of the continued weakness of the US currency.

    The cartel is under pressure from its members, who have seen the potential value of their earnings fall sharply since 2000, as a result of the continued reliance on the dollar. The dollar has fallen in value by 44 per cent against the euro over the past seven years.


    plus an interesting quote from US ME allies

    Dollar pricing is a sensitive issue. Saudi Arabia's Foreign Minister Prince Saud Al-Faisal warned at the time of the summit that the dollar could collapse if Opec conducted a public discussion on the merits of ending pricing in dollars.

    "Everybody is very anxious in the international community," said Al-Faisal. "Hopefully we can find a way to safeguard our economies in these uncertain times."


    US Saudi
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  • #2
    I imagine the price of oil is higher in dollars to account for the increased risk of currency devaluation. They're right too because the government will keep on spending like mad, rightwingers will continue claiming no one should be taxed to *GASP* actually pay for this spending, and we'll keep importing everything like mad while producing little to nothing of value.
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    • #3
      It wouldn't be a big deal if OPEC switched to the Euro. I don't know why they would care in what currency they get paid, so long as the currency is stable and liquid -- such that you could trade out of it easily into your preferred currency. The dollar is and will remain a stable currency.
      I came upon a barroom full of bad Salon pictures in which men with hats on the backs of their heads were wolfing food from a counter. It was the institution of the "free lunch" I had struck. You paid for a drink and got as much as you wanted to eat. For something less than a rupee a day a man can feed himself sumptuously in San Francisco, even though he be a bankrupt. Remember this if ever you are stranded in these parts. ~ Rudyard Kipling, 1891

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      • #4


        Unless i'm misreading this...
        Price/bbl in USD: 50ish
        Price/bbl in EUR: 40ish

        USD per EUR: 1.5ish

        Price of EUR bbl: $60USD

        So I need to be buying oil in USD and selling it in EUR I suppose?
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        • #5
          The graph's way out of date -- there to illustrate the divergence.
          I came upon a barroom full of bad Salon pictures in which men with hats on the backs of their heads were wolfing food from a counter. It was the institution of the "free lunch" I had struck. You paid for a drink and got as much as you wanted to eat. For something less than a rupee a day a man can feed himself sumptuously in San Francisco, even though he be a bankrupt. Remember this if ever you are stranded in these parts. ~ Rudyard Kipling, 1891

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          • #6
            Well the stronger the currency that the oil is priced in the more incentive OPEC has to pump, so it would be better for everyone. But the thing is that it's just speculation what the values of the currencies will be in the future.
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            • #7
              Also, the US would not be able to lower interest rates to keep the economy on track they way that they do, because doing so would directly increase the price of oil.
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              • #8
                The fall of the USD itself is a cause for dearer oil, since any given fall of the USD ought to be compensated with a rise of the oil price in USD terms, as the underlying value of oil doesn't change (all else being equal). It's not a coincidence both oil and gold are peaking when the USD is hitting new lows.
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                • #9
                  Originally posted by Colonâ„¢
                  The fall of the USD itself is a cause for dearer oil, since any given fall of the USD ought to be compensated with a rise of the oil price in USD terms, as the underlying value of oil doesn't change (all else being equal). It's not a coincidence both oil and gold are peaking when the USD is hitting new lows.
                  Yes, but for the USD OPEC has to cut production to maintain the price. If the oil was not priced in USD the price of oil would increase automatically in the US.
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                  • #10
                    sure it is not a coincidence, but the negative effect on US economy is a lot greater than for the rest of the world, as they have to fork out a LOT more comparatively speaking than we do on continuous basis to keep things going... so there is a pretty strong of negative feedback loop going on... in any case US is really carrying the brunt of this oil spike...

                    I am surprised that the inflationary pressures out of all this did not start kicking in already and a lot stronger than "reality" is showing... and now with the interest rates being low again... 150BN tax boost... wander how will this one finish... looks to me like the FED is running out of playing cards and talk of OPEC switching is certainly not good news for the already battered dollar...

                    some analysts think that Dollar will never ever be so comparatively low like it is now, but I am not that certain given the different trajectories US an EU economies are going (not to mention the ever stronger developing world ones)... 2/1 looks more likely to me in the future tha 1:1 parity... but hope I am wrong as US economic "free fall" is not good for anyone involved.
                    Socrates: "Good is That at which all things aim, If one knows what the good is, one will always do what is good." Brian: "Romanes eunt domus"
                    GW 2013: "and juistin bieber is gay with me and we have 10 kids we live in u.s.a in the white house with obama"

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                    • #11
                      Originally posted by DanS
                      It wouldn't be a big deal if OPEC switched to the Euro. I don't know why they would care in what currency they get paid, so long as the currency is stable and liquid -- such that you could trade out of it easily into your preferred currency. The dollar is and will remain a stable currency.
                      Exactly. That is so obviously right. It seems so absurd to me that people who should know better keeps saying that it really makes a difference which currency oil is priced in.
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                      • #12
                        but the amount of liquidity should make no difference??? I am sure that Chineze will keep on buying USD for political reasons, but many others will not, and will try to get rid of USD for that other currencies in demand/else...

                        I am sure it will make more than a dent in the valuation...
                        Socrates: "Good is That at which all things aim, If one knows what the good is, one will always do what is good." Brian: "Romanes eunt domus"
                        GW 2013: "and juistin bieber is gay with me and we have 10 kids we live in u.s.a in the white house with obama"

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                        • #13
                          I don't see why it should make any difference. If you wanted to you could already today just agree on the purchase price in dollars, but then just do the purchase in euros, using the momentary exchange rate.

                          The choice of units is arbitrary, and can be changed without any effect.
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                          • #14
                            Quite true. There might be a very, very slight advantage to the US for having the dollar as the trading currency -- it guarantees that the dollar is liquid. But let's face it, the dollar would be liquid in any event. As proof, just look at the Euro, which isn't the trading currency, but is and will remain plenty liquid.

                            The matter is only an issue of convenience. Some contracts in Indonesia or wherever are written such that the value of the dollar is fixed, even though parts of the transaction are exposed to other currencies. Of course, we know that the value of the dollar isn't fixed. Rather, it's relative to all other currencies. It may take some time for people to write their contracts to take this into account. There is some "stickiness" here.

                            In any event, there's no issue of great significance here. Saudi Arabia is only saying it's an issue because the Iranians are saying it's an issue. It's only "sensitive" in that the Saudis are our allies and don't wish their rivals, the Iranians, to feel like they made hay on the issue. In other words, the issue over which they are fighting is unimportant to the fight that's going on.
                            Last edited by DanS; March 1, 2008, 12:28.
                            I came upon a barroom full of bad Salon pictures in which men with hats on the backs of their heads were wolfing food from a counter. It was the institution of the "free lunch" I had struck. You paid for a drink and got as much as you wanted to eat. For something less than a rupee a day a man can feed himself sumptuously in San Francisco, even though he be a bankrupt. Remember this if ever you are stranded in these parts. ~ Rudyard Kipling, 1891

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                            • #15
                              The weakness in the dollar is causing inflation from oil. So right now it doesn't really matter what the key currency is. But at times in the past the fact that the USD was the key currency allowed the US to use loose monetary policy and not import inflation.
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