Note: I credit Martin Evans, Professor of Ecconomics, Georgetown University for remarks that inspired this analysis … of course, I take all blame for any improper analysis or wrong conclusions.
One of the driving forces behind the recent rise in oil & gas prices has been the weakening foreign exchange value of the US dollar.
Comparing the price of oil — over time — valued in both dollars and another stronger currency helps calibrate the effect of the weakening dollar. For example, compare the spot price of Brent Sea Crude (a represntative oil price) expressed in $ US and Euros (a relatively strong currency — compared the the US $) :
To visualize the tracking of the curves more easily, shift the Euros curve up a little so that the two curves have the same starting point. In technical terms, this process is “indexing” the two series at a common starting points.
Click chart to make it bigger
To the extent that the curves follow each other — as they did in 2006 — the apparent currency effect is minimal. That is, the oil price changes are due to other factors — say, supply & demand or financial speculation.
To the extent that the curves diverge — as they start to do in early 2007 — the apparent currency effect is increasingly meaningful. Note that the separation between the curves increases throughout 2007, and continues in 2008.
In US dollars, the oil price went from $53.68 in January, 2007 to $122.80 in May, 2008 — up $69.12, a 128% increase.
The oil price went from 41.30 Euros in January, 2007 to 78.93 Euros in May, 2008 — up 37.63 Euros, a 91% increase.
By inference, if the US $ had held constant relative to the Euro, the oil price in May, 2008 would have been $102.52 ($53.68 plus 91%). It didn’t, so the $20.28 difference ($122.80 – $102.52 = $20.28) is reasonably attributable to he currency effect of weakened dollar.
Taking some bold statistical liberties, it can be inferred that about 30% of the oil price surge is tied to the weakening dollar ($20.28 / $69.12 = 29.3%) and that about 70% of the increase in oil prices is attributable to non-currency related factors (i.e. fundamentals and speculation).
Of course, these estimates are quite crude* …
* pun intended
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