Affect of the weakening of the dollar on the price of oil?

I often hear these days that because the price of a barrel of oil is denominated in dollars, when the dollar weakens, the price of oil goes up.

I can see why that is so, but does that mean that the price of oil for other countries (like in Europe) should not change for them since the dollar is weakening against their currencies?

2 Responses to “Affect of the weakening of the dollar on the price of oil?”

  1. simplicitus Says:

    Exactly. But only up to a point.

    The U.S. has seen greater changes in the price of oil than have the Europeans because the U.S. sees both the changes due to the weakening of the dollar and the changes due to increased demand, while Europeans have seen only the changes due to increased demand.

    On the other hand, in reality, the changes in price due to the changes in demand have been more important. Oil went from $20 to over $140 dollars per barrel between 2002 and 2008:
    http://www.eia.doe.gov/emeu/steo/pub/fsheets/real_prices.html

    That is a factor of 7. In that period, the exchange rate between the dollar and the Euro has only changed by about 60%:
    http://www.fundmasteryblog.com/2008/06/09/how-far-has-the-dollar-fallen-and-why-whats-next/

    So while the U.S. saw an increase of 7X, Europe "only" saw an increase of 4X – significantly less, but still very, very, painful.

  2. SDD Says:

    The dollar and oil move pretty much in the same direction. And the dollar is weak, it’s been getting much stronger over the last six months or so. The price of oil in virtual every currency is less now than six months ago.