Thursday, February 25, 2010

A Depreciated Dollar is NOT Appreciated by Oil Producing Countries---Should We Care???

Oil producing countries do not like a depreciating US Dollar.  As with most commodities (oil, wheat, corn, sugar, soybeans, gold, silver, on and on...) that are traded in world markets, the currency of record is the US Dollar.  In other words to buy or sell oil, countries need dollars to do so.  Today a barrel of oil (42 gallons in a barrel) sold for $78.17.  Lets use Canada as an example.  Canada is our number one source for foreign oil (surprised?).  Assume today Canada sells that barrel of oil and gets the $78.17.  More than likely they will exchange those dollars for Canadian currency (they dont have to, but lets assume so).  At todays exchange rate of $1.00 =  1.05CN the Canadians would recieve ($78.17 X 1.05) 82.08CN.  NOW, assume the dollar depreciates relative to the CN, or vice versa, the CN Appreciates relative to the dollar and the exchange rate is $1.00 = 1.00CN ($1.00 buys fewer CN than it did before).  Now the Canadians would only get ($78.17 X 1.00CN) 78.17CN---LESS than before!! In order for the Canadians to get AT LEAST what the got before the depreciaton of the dollar, they would NOW have to "get" $82.08 US dollars for a barrel of oil.  Every other country that sells oil, ceteris parabas, is going to be in the same situation.  The international market price for oil tends to increase.  There is a consistent inverse relationship between the price of oil and the value of the dollar (see graph...keep in mind there are other varibles at work too).  This works in reverse as well---an appreciating dollar tends to decrease the price of oil and other internationally traded commodities...
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