The oil price: now available in euros

A long time ago on a blog far away, I posted a graph showing the oil price in euros. The resulting trace looked rather different from the conventional US$ measure.

With that blog dead, several years passed, and another round of ‘oooh, isn’t oil expensive’ fussing currently taking place, I thought it might be a good idea to update and repost…

Oil price in US$ and EUR

So the situation has changed a bit since 2005: at the time, taking euros as a base, it looked like the rise in dollar prices could be classed as more of a reflection of the US’s economic position than of the true cost of oil.

This year, it’s entirely clear that oil prices have risen dramatically and will keep rising, despite the US$ also being entirely up the creek. Although the epic rises of the last few days most likely do owe more to the dollar’s flailing collapse.

[for data geeks: oil prices from US DoE using IRAC to March 2007 and composite from April-September 2007. Currency conversion at interbank rate for first of the month]

  1. It should be noted that oil trading all takes place in dollars (i.e. it isn’t just priced in dollars). This means importer nations are required to keep a dollar reserve equal, at least, to their oil spend.

    So not only is the oil price being artifically inflated by the slide of the dollar, but the extent of the dollar’s slide is being artifically kept in check by the global oil trade.

  2. Alex said:

    This means importer nations are required to keep a dollar reserve equal, at least, to their oil spend.

    Er, no; it might have in the 1950s under Bretton Woods, but as anyone can buy as many dollars as anyone else will sell them , as and when required, instantly, this is not so.

    The transmission mechanism is actually how much the oil-exporting states import from a) the dollar zone and b) the euro zone respectively. Consider the simple case, in which we have one oil exporter, two importers (dollarland and euroland), and three goods (oil, dollarstuff and eurostuff). The exporter receives dollars from the two importers; assuming they import from the two stuff-exporters equally, they have to convert half of them into euros.

    If they were to receive euros instead they’d have to convert half of them to dollars; the aggregate demand for each currency attributable to oil revenues would be the same. It would change if the oil exporter chose to buy more eurostuff or dollarstuff.

  3. Alex, I’m not an economist, so I fully accept that I may have misinterpreted — or failed to grasp some nuance of — the items I’ve read on this subject.

    Because of this, I may have misused the term “dollar reserve” in a technical sense. Perhaps it would be more accurate to say that whenever an oil transaction takes place, a dollar transaction must preceed it. Some nations (Japan for instance) hold large dollar reserves, while some will buy dollars as and when they need to buy oil.

    Both of these mechanisms artifically inflate the dollar, however.

    Rather annoyingly, the article upon which I based much my view on this issue appears to have disappeared from the internet. It was an interview with Sheikh Ahmad Fahd al-Sabah (Kuwaiti Oil Minister and President of OPEC) back in 2005 (I think) in which he stated — I’ve paraphrased from memory — the above.

    I myself had always been under the impression that while oil might be priced in dollars, it could be traded in whatever currency the two parties agreed upon. Sheikh Ahmad Fahd al-Sabah’s point however, was that OPEC nations only accept payment in dollars. So Japan cannot buy oil from Saudi Arabia with Yen. It must first purchase dollars (using either goods, services, or Yen).

    As I say I’m not an economist, and I’m willing to be corrected on this. But as I understand currency markets, the fact that an ongoing market for dollars is guaranteed amongst oil importers (those who import from OPEC at least) will help support the strength of the dollar as a currency.

    If this is not the case, then I’d be interested to know why not?