Oil and the Dollar

We all know the price of oil continues to rise.


Source: etfzone.com


The black line shows the nominal price of oil. The blue line shows the real price of oil i.e. the price of oil taking inflation into account. As you can see from the chart, taking inflation into account, oil is now trading at an all-time high.

Various reasons have been put forward for this:

  • Demand – greater demand for oil from growing economies such as China and India. Oil is a raw material and is needed for the production of consumer goods.
  • Supply – is limited and the supplies that are left are difficult and more costly to access.
  • Speculation – given the first two factors i.e. rising demand and a limited supply, it is inevitable speculators will trade the commodity. Also, pension funds and investors are now putting more money into oil as they see oil as a better investment than shares.

Another question frequently asked in relation to oil is:

Why does the price of a barrel of oil increase when the dollar falls in value?

Oil is priced in US dollars so you would expect oil to get cheaper (for non-US buyers) when the dollar falls but this is not the case. Here is an excellent explanation of why this is.

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