[lorenzo]

Very simple question: the €uro is 23% more powerful than the US$. Does this mean that - since petroleum is traded in dollars - the €U can buy petroleum 23% easier than the U$?

Or doesn't it work that way?

[LadyRuby]

This is a question I've had, which is kind of similar. If the "value" of a barrel of oil is the same, as the dollar falls should the cost of oil in dollars rise?

I think it was Mr. Bill who explained that there isn't a direct correlation between the value of the dollar and the price of a barrel of oil, but I've noticed a couple of times recently when the price of oil rose quickly in a day or two for no very apparent reason, but at the same time the value of the dollar fell. I'd like to see a chart showing the value of the dollar vs. the price of oil in dollars.

[lorenzo]

Exactly, the question is in fact so simple, but I've had a hard time figuring it out, because it looks as if there is such a correlation, which changes the dollar-€uro equation. Would the dollar indeed still be a real petro-dollar?

Maybe someone with skills in economics can help us out.

[mekrob]

It seems almost necessary for the price of oil to go up as the dollar goes down. Why wouldn't it? I mean, the dollar is worldwide and is used in the transactions of petroleum and natural gas. If we import more than 60% of our oil, and the dollar goes down, then foreign countries are going to want to get the same value (dollar to other world currencies) for that barrel of oil, forcing the price of oil up.

I have little economics training. It just seems to make sense.

I've read that oil hasn't really gone up that much in Europe because of the falling dollar to the euro. I can't find anyone to answer that question. It seems like if ours went up three fold in five years, but our dollar declined 50%, then oil prices in europe (EU) should only haven risen about 1.5 fold.

[jaws]

All prices are simply exchange ratios. When a barrel of oil is quoted at 75$, it means that 75$ U.S. dollars exchanged for 1 barrel of oil. An exchange rate is also a price. If the current Euro exchange rate is 1.23$, it means that 1.23 US$ have exchanged for 1 Euro.

From these two prices you can construct the barrel of oil/euro price.

[CrudeAwakening]

So if the dollar were to fall e.g against the Euro, and there were no counterbalancing change in the oil price, Eurozone countries would effectively be paying less for their dollar-denominated barrels of oil.

I'm curious as to to what extent higher oil prices are supporting the value of the dollar. Anyone got any info on this?

[tugboat]

Here's another attempt to keep the dollar strong:

IMF wins new powers to police globaleconomy
http://today.reuters.co.uk/news/newsArt ... UP-IMF.xml

[MOCKBA]

$this->bbcode_second_pass_quote('CrudeAwakening', 'S')o if the dollar were to fall e.g against the Euro, and there were no counterbalancing change in the oil price, Eurozone countries would effectively be paying less for their dollar-denominated barrels of oil.

I'm curious as to to what extent higher oil prices are supporting the value of the dollar. Anyone got any info on this?

[LadyRuby]

$this->bbcode_second_pass_quote('jaws', 'A')ll prices are simply exchange ratios. When a barrel of oil is quoted at 75$, it means that 75$ U.S. dollars exchanged for 1 barrel of oil. An exchange rate is also a price. If the current Euro exchange rate is 1.23$, it means that 1.23 US$ have exchanged for 1 Euro.

From these two prices you can construct the barrel of oil/euro price.

[MOCKBA]

$this->bbcode_second_pass_quote('LadyRuby', ' ')Is there something I'm missing or misunderstanding?

[LadyRuby]

Here's an article posted December, 2004. Funny 18 months late how the price of oil has gone up substantially, as had the trade deficit. But other than that no real changes....same story.

From his article still not clear to me if oil increases because the dollar has declined or vice versa.

But check out this article (I've copied only a little below), suprisingly candid and very rational for December, 2004.

Vicious cycle: Rising oil prices, falling dollar

$this->bbcode_second_pass_quote('', '.')..Because we import so much of the oil we use, the huge jump in petroleum prices has added to the growing U.S. trade deficit in goods and services with the rest of the world. That deficit -- the difference between the cost of what we import and what we export --climbed to $51.6 billion in September 2004. Contrast that with the $29.6 billion monthly U.S. trade deficit in January 2002, before the price of oil spiked.

That deficit can’t be blamed wholly on the rising price of oil or on U.S. oil imports in general, but the petroleum-related part of the deficit is now so large that it just about guarantees rising oil prices in the future. And that’s because oil is priced in U.S. dollars, and the fall of the value of the dollar has led to a decline in the value of the dollars that the Organization of Petroleum Exporting Countries collects for its oil.

...Think about being the executive of a Saudi oil company that wants to buy equipment from France’s Schlumberger Limited. Thanks to the fall in the dollar against the euro, that equipment costs 10% more in dollars on Dec. 8, 2004, than it did a year earlier. And if you go back further to the dollar’s high against the euro in 2002, that oil equipment priced in euros now costs 57% more than it did in 2002. (The euro zone countries represent the biggest source of OPEC imports, so the exchange rate between U.S. dollars and euros is critical to OPEC finances.)

No wonder OPEC is so intent on raising its target price to $30, a huge increase from the current target of $22 to $28 a barrel, as it was expected to do at its meeting today, Dec. 10.
...

And this is where the vicious cycle kicks in. Every dollar increase in the price of a barrel of imported oil increases the size of the U.S. trade deficit, which puts more pressure on the value of the U.S. dollar, which leads to a weaker dollar, which makes OPEC countries want to raise the dollar-denominated price of a barrel of oil to make up for the dollar’s fall, and so on.
...
A vicious cycle, like its self-reinforcing good counterpart the virtuous cycle, doesn’t reverse overnight. Ending this one will require a drop in U.S. energy imports sufficient to decrease the U.S. energy bill, thereby shrinking the U.S. trade deficit and decreasing the supply of dollars sloshing around OPEC. (A little fiscal discipline on the part of the U.S. government, a revaluation of the Chinese yuan and a pickup in global growth so that overseas consumers could buy more cheap U.S. exports wouldn’t hurt, either.)

[CrudeAwakening]

$this->bbcode_second_pass_quote('MOCKBA', '')$this->bbcode_second_pass_quote('CrudeAwakening', 'S')o if the dollar were to fall e.g against the Euro, and there were no counterbalancing change in the oil price, Eurozone countries would effectively be paying less for their dollar-denominated barrels of oil.

I'm curious as to to what extent higher oil prices are supporting the value of the dollar. Anyone got any info on this?

[MOCKBA]

$this->bbcode_second_pass_quote('CrudeAwakening', '')$this->bbcode_second_pass_quote('MOCKBA', '')$this->bbcode_second_pass_quote('CrudeAwakening', 'S')o if the dollar were to fall e.g against the Euro, and there were no counterbalancing change in the oil price, Eurozone countries would effectively be paying less for their dollar-denominated barrels of oil.

I'm curious as to to what extent higher oil prices are supporting the value of the dollar. Anyone got any info on this?

[jaws]

$this->bbcode_second_pass_quote('LadyRuby', 'B')ut the point that several of us are making here, is that as the value of the dollar declines (and the Euro for example increases relative to the dollar) the "cost" of a barrel of oil decreases for those who don't rely heavily on dollars, while it's inherent value stays the same (since unlike gold, oil has an intrinsic value by performing many functions). So it then becomes perhaps more of a bargain, which pushes the dollar price of oil up. That increased dollar price of oil actually may actually represent no price increase to those who rely largely on Euros (or less of an increase) since the value of those other currencies has increased relative to the dollar. Is there something I'm missing or misunderstanding?

[CrudeAwakening]

$this->bbcode_second_pass_quote('MOCKBA', 'A')gain, why Euro has to rise against USD?

[MOCKBA]

$this->bbcode_second_pass_quote('CrudeAwakening', '')$this->bbcode_second_pass_quote('MOCKBA', 'A')gain, why Euro has to rise against USD?

[pogoliamo]

$this->bbcode_second_pass_quote('lorenzo', 'V')ery simple question: the €uro is 23% more powerful than the US$. Does this mean that - since petroleum is traded in dollars - the €U can buy petroleum 23% easier than the U$?

Or doesn't it work that way?

[CrudeAwakening]

$this->bbcode_second_pass_quote('MOCKBA', '
')I gotta be very stupid, but I still do not understand why there could be an assumption that the dollar "continues to loose value against the Euro". It is just a currency. Why somebody make a fetish out of it?

No matter what the price of a barrel is in US dollars or Mongolian tugriks everybody pay the same even in sea shells. If there is a mis-pricing of currency (or competative advantage) then there is George Soros to turn that to his advantage and finance a heard of his vassals. So one of us, has to be tripping, but everyone pays the same.

If it is cheaper in Euro by yota then George Soros would make it more expensive in Euro way before it would be unprofitable to sell VolksWagens in US, but the again George Soros would take care that VolksWagens are selling in the numbers they are supposed to sell.

[Tyler_JC]

The world has a limited supply of oil and an even more limited number of suppliers. OPEC has to choose which country to sell its resource too.

The US promises $$$.

The EU promises €€€.

If OPEC takes $$$, it risks losing some of the value of those $$$ by dollar devaluation over time.

If OPEC takes €€€, it risks being dismantled by military invasion or at the very least, threatened with military action.

If you were the president of OPEC, which sounds like a better deal? A little devaluation over time or utter chaos?

China has a problem as well.

Should it invest its hundreds of billions of $$$ back into the United States Treasury and keep its citizens employed? Or should it try to find a better return on investment and risk creating a massive unemployed workers' revolt?

Japan has the same problem.

Japan's economy is actually slightly more dependent on trade with the USA than China is. Exporting to America is 23% of Japan's economy. Whereas China-to-America trade is only 21% of China's economy.

The Japanese import more goods and services from the US than China does, that adds to the complexity.

...and the point of my post...

The global economy is extremely intertwined and complex. It is difficult to point your finger at one country or group of countries for the changes in the market. Just assume that someone is making large sums of cash off of every transaction and that's maybe 2/3 of all global public policy.

[MrBill]

Wrote this back in March to try to explain FX moves on the purchase price of crude in dollars, euros and yen. The logic is basic.
$this->bbcode_second_pass_quote('', 'P')osted: Fri Mar 03, 2006 4:47 pm Post subject: Re: Trader's Corner 2006

RE housing affordability and silver. They may converge, but that may mean that houses get cheaper in real terms. Global interest rates are on the rise. The ECB is hiking rates, the BOJ is taking their foot off the brake, the Chinese see the downside of running an ultra-loose monetary policy, and they are reluctant to keep building their foreign reserves much further. That and higher energy and commodity prices that are also acting as a deflator by raising the costs of production, weakening margins and/or giving consumers less spending power. At this point in the cycle, I wouldn't touch Turkish (+) debt for sure, nor would I be buying houses in a market like Calfornia, in which only about 14% of the population can afford a house*. However, I do see a weaker dollar feeding into energy and commodity prices as rises will be more moderate as measured in euro, yen and yuan.

Using today's $65/1.2000 = 54.17 euros and using an end of the year forecast for dollars of 1.2600 = $68.25 in nominal terms without raising the price at all euros.

If the yen appreciates to 110 from 116 that would mean that Japan would also be buying oil in yen at today's price even if it climbs to $68.25 in nominal terms. But that is being very conservative. We may easily see a 10% fall in the value of the dollar against the yen to 105. Although I am not sure that the euro would appreciate that much against the dollar as there will be sellers of the euro against the yen as well.

Assuming no world recession that would be a double competitive advantage for Japanese exporters. One their economy uses only two thirds the energy as the other G7 countries per unit of output, and secondly in yen denominated terms oil would be getting cheaper for Japan relative to either oil in euros or dollars. Especially as inter Asian trade is growing as an overall percentage of overall trade.**

*Affordability Index (as measured by 25% downpayment, 25 year mortgage, today's prices and making payments using no more than 30% of their gross income at current interest rates).

** if my math is correct should be someting like this
$65 x 1.05% = $68.25
$1.2000 x 1.05% = $1.2600
$65 / 1.2000 = 54.16 euros
$68.25 / 1.2600 = 54.16 euros
116/1.05% = 110.48
$65 x 116 = 7540 yen
$68.25 x 110.48 = 7540 yen
$68.25 x 105 = 7166 yen
7166 x 0.667 = 4778 yen
crude at 4778 yen is equivalent to $68.25 x 100% of G7 average using a USD/JPY exchange rate of 105 versus 116 today.***
1.2000 x 116 = 139.20 EUR/JPY
1.2600 x 105 = 132.30 EUR/JPY
is equal to a 5% real appreciation of the yen against the euro

***obviously crude is not the only factor which determines manufacturing competiveness. Land, labor, capital, technological know-how, patents, productivity per worker and other metrics also affect the cost of production. But as we know that Japan is a successful export orientated economy we can then just look at the marginal effect of higher energy prices on their competitiveness.

(+) Brazil, Mexico, Venezuela and some other EMs have announced plans to buy back external debt in dollars starting in the short-end of the curve, which is putting upward pressure on bond prices and compressing yields. Some countries like Ukraine have underperformed, but overall it has been an interesting asset class. Even Turkey has benefited from ME oil revenue that has been invested in infrastructure there. However, if the yen carry unwinds some hedge funds may have to sell EM debt as well. Therefore, these countries will have to replace those funds either domestically in local currency or through higher interest rates in foreign currency.

Last edited by MrBill on Fri Mar 03, 2006 5:45 pm; edited 1 time in total