The U.S. Dollar And Oil Relationship Is Changing
2 min read
In majority, primary commodity prices are expressed in US Dollar (USD), especially oil prices, not only within the commodity markets but also in many international organizations, for instance, in the International Financial Statistics (IMF), or in terms of indices based on dollar prices. As such, oil prices are obviously affected by inflation as well as real developments, and also by the value of the US Dollar exchange rate. Therefore, a change of both variables affects the international trade of all economies. In the case of oil prices, any change of them affects prices of other primary commodities, products and services, and subsequently macroeconomic indicators of oil exporting and importing countries.
A barrel of oil is priced in U.S. dollars across the world. When the U.S. dollar is strong, you need fewer U.S. dollars to buy a barrel of oil. When the U.S. dollar is weak, the worth of oil is higher in dollar terms.
The us has historically been a net importer of oil. Rising oil prices cause the United States’ balance of deficit to rise as more dollars are needed to be sent abroad.
According to the Energy Information and Administration (EIA), the USA is now about 90% self-sufficient in terms of total energy consumption.
The technological breakthrough of fracking has disrupted the established order within the oil market.
As U.S. oil exports have increased, oil imports have decreased. This means that higher oil prices not contribute to a better U.S. trade deficit, and actually helps to decrease it.
As a result, we’ve seen the historically strong inverse relationship between oil prices and therefore the U.S. dollar is becoming more unstable.
