Dollar strength is putting upward pressure on the price of oil for everyone other than Americans.
Because crude is priced in dollars, a strong US currency forces all other countries to use up more of their own local denominations to buy the dollars that pay for supplies.
Dollar advance on all fronts
The 15-nation energy cartel the Organisation of Petroleum Exporting Countries (OPEC), in its November oil report, notes that the dollar “advanced further in October, as the strength of the US economy continues to support a relatively faster monetary tightening by the US Fed (the Federal Reserve, America’s central bank)”.
Higher interest rates make dollar assets more attractive, and thus push up the value of the dollar.
“Against the Swiss franc, the dollar rose by 2.6%. Against the pound sterling, the dollar advanced by 0.4%, moving sideways following the latest Brexit developments. Against the Japanese yen, the dollar advanced by 0.7% month-on-month, as the Bank of Japan remains committed to its very accommodative monetary policy.”
The effect of this on crude prices was to push up the “OPEC reference basket”, an average of oil costs, from $77.18 a barrel in late September to $79.39 a barrel in late October. Once inflation and currency fluctuations are taken into account, the “real” increase was from $49.73 a barrel to $51.62.
Enter the euro?
This morning, , a benchmark used in international transactions, was 1.17% higher at $63.26 a barrel, while (WTI) was $54.41 a barrel. During the last month, Brent has declined from $79.83 a barrel, while WTI has come down from $66.43 a barrel.
Back in 2003, when the single European currency was in its infancy, there were suggestions that the euro could replace the dollar as the currency in which oil would be priced. In February of that year, an article in The Guardian asked: “When will we buy oil in euros?” But use of the euro in oil trading was largely limited to deals with Iraq, then embroiled in a war of words with the US, which had announced that it would henceforth accept euros in payment.
An alternative suggestion has been that oil could be priced against a basket of currencies.