Dollar and Oil

8/8/2019 Dollar and Oil

1/41

A. F. Alhajji. July 2004 1

The Impact of Dollar Devaluation

on World Oil Industry:Do Exchange Rates Matter?

A. F. Alhajji, Ph.D.

Associate Professor

College of Business Administration

Ohio Northern university

Ada, Oh, 45810


2/41


Outline Introduction

The Impact of Exchange Rates on Supply Exchange Rates and Drilling Activities

Exchange Rates and Production

Exchange Rates and Exports

Exchange Rates and Purchasing Power Exchange Rates and Inflation

The Impact of Exchange Rates on Demand The direct impact The indirect impact

Empirical Evidence

Conclusions


3/41


4/41


Observations Oil Prices are high only in dollars but they are

relatively low in other currencies, especially

the Euro and the yen.

See the four figures below


5/41


Oil Prices in Dollar and Euro

8

13

18

23

28

33

38

43

1/4/1999

4/4/1999

7/4/1999

10/4/1999

1/4/2000

4/4/2000

7/4/2000

10/4/2000

1/4/2001

4/4/2001

7/4/2001

10/4/2001

1/4/2002

4/4/2002

7/4/2002

10/4/2002

1/4/2003

4/4/2003

7/4/2003

10/4/2003

1/4/2004

4/4/2004

WTI ($) Brent ()$&/b


6/41


Oil Prices Dollar and Yen

0

5

10

15

20

25

30

35

40

1973-10-01

1974-10-01

1975-10-01

1976-10-01

1977-10-01

1978-10-01

1979-10-01

1980-10-01

1981-10-01

1982-10-01

1983-10-01

1984-10-01

1985-10-01

1986-10-01

1987-10-01

1988-10-01

1989-10-01

1990-10-01

1991-10-01

1992-10-01

1993-10-01

1994-10-01

1995-10-01

1996-10-01

1997-10-01

1998-10-01

1999-10-01

2000-10-01

2001-10-01

2002-10-01

2003-10-01

01000

2000

3000

40005000

6000

7000

8000

9000

10000

$ Oil Price Oil Price$/b /b


7/41


Oil Prices in Dollar and DM

0

10

20

30

40

50

60

70

80

90

100

O

ct-73

O

ct-74

O

ct-75

O

ct-76

O

ct-77

O

ct-78

O

ct-79

O

ct-80

O

ct-81

O

ct-82

O

ct-83

O

ct-84

O

ct-85

O

ct-86

O

ct-87

O

ct-88

O

ct-89

O

ct-90

O

ct-91

O

ct-92

O

ct-93

O

ct-94

O

ct-95

O

ct-96

O

ct-97

O

ct-98

O

ct-99

O

ct-00

O

ct-01

O

ct-02

O

ct-03

$ Oil Price DM Oil Price


8/41


Oil Prices in Dollar and Sterling

0

5

10

15

20

25

30

35

40

O

ct-73

O

ct-74

O

ct-75

O

ct-76

O

ct-77

O

ct-78

O

ct-79

O

ct-80

O

ct-81

O

ct-82

O

ct-83

O

ct-84

O

ct-85

O

ct-86

O

ct-87

O

ct-88

O

ct-89

O

ct-90

O

ct-91

O

ct-92

O

ct-93

O

ct-94

O

ct-95

O

ct-96

O

ct-97

O

ct-98

O

ct-99

O

ct-00

O

ct-01

O

ct-02

O

ct-03

$ Oil Price Oil Price$//b


9/41


Results Dollar devaluation reduces oil supply and increases oil

demand. Dollar devaluation reduces drilling activties in some areas

such as the North Sea.

Dollar devaluation reduces drilling activities in the oilproducing countries. It reduces their purchasing power andcauses inflation.

Dollar devaluation increases oil demand in Europe and Japan

Dollar devaluation increases oil demand in the US as UStourists spend their vacations in the US instead of Europe.


10/41


Observations on Drilling Activities Drilling activities are highly correlated with

oil prices

There is a lag when prices increase. No lag

when prices decrease. Changes in the world rig count are

misleading. They follow changes in US. This pattern does not hold in recent months.

Is it because of dollar devaluation?


11/41


Observations on Drilling Activities Drilling activities in the Middle East and Latin

America are highly correlated with oil prices in USdollars

Drilling activities in Europe are positively correlatedwith oil prices in Euro and negatively correlated with

oil prices in US dollars. As prices in Euro decrease

(lower dollar), rig count decreases. As the dollargoes down, rig count goes down

See the following six figures.


12/41


Oil Prices and Rig Count

500

1500

2500

3500

4500

5500

6500

1975January

1976January

1977January

1978January

1979January

1980January

1981January

1982January

1983January

1984January

1985January

1986January

1987January

1988January

1989January

1990January

1991January

1992January

1993January

1994January

1995January

1996January

1997January

1998January

1999January

2000January

2001January

2002January

2003January

2004January

0

5

10

15

20

25

30

35

40

U.S. World Oil Price

Rigs $/B

Price


13/41


Oil Prices ($) and Rig Count

(Latin America)

0

100

200

300

400

500

600

1975January

1976January

1977January

1978January

1979January

1980January

1981January

1982January

1983January

1984January

1985January

1986January

1987January

1988January

1989January

1990January

1991January

1992January

1993January

1994January

1995January

1996January

1997January

1998January

1999January

2000January

2001January

2002January

2003January

2004January

0

5

10

15

20

25

30

35

40

Latin America Oil Price$/bRigs


14/41


Oil Prices and Rig Count

(Middle East)

0

50

100

150

200

250

300

1975

January

1976

January

1977

January

1978

January

1979

January

1980

January

1981

January

1982

January

1983

January

1984

January

1985

January

1986

January

1987

January

1988

January

1989

January

1990

January

1991

January

1992

January

1993

January

1994

January

1995

January

1996

January

1997

January

1998

January

1999

January

2000

January

2001

January

2002

January

2003

January

2004

January

0

5

10

15

20

25

30

35

40

M East Oil PriceRigs $


15/41


Rig Count: World-US, US, Vs. Oil Prices

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

1975January

1976January

1977January

1978January

1979January

1980January

1981January

1982January

1983January

1984January

1985January

1986January

1987January

1988January

1989January

1990January

1991January

1992January

1993January

1994January

1995January

1996January

1997January

1998January

1999January

2000January

2001January

2002January

2003January

2004January

0

5

10

15

20

25

30

35

40

World-US U.S. Oil Price

Rigs $/b

Price


16/41


Oil Prices ($) Vs Rig Count in Europe

0

50

100

150

200

250

300

1

9

7

5

J

a

n

u

a

ry

1

9

7

6

J

a

n

u

a

ry

1

9

7

7

J

a

n

u

a

ry

1

9

7

8

J

a

n

u

a

ry

1

9

7

9

J

a

n

u

a

ry

1

9

8

0

J

a

n

u

a

ry

1

9

8

1

J

a

n

u

a

ry

1

9

8

2

J

a

n

u

a

ry

1

9

8

3

J

a

n

u

a

ry

1

9

8

4

J

a

n

u

a

ry

1

9

8

5

J

a

n

u

a

ry

1

9

8

6

J

a

n

u

a

ry

1

9

8

7

J

a

n

u

a

ry

1

9

8

8

J

a

n

u

a

ry

1

9

8

9

J

a

n

u

a

ry

1

9

9

0

J

a

n

u

a

ry

1

9

9

1

J

a

n

u

a

ry

1

9

9

2

J

a

n

u

a

ry

1

9

9

3

J

a

n

u

a

ry

1

9

9

4

J

a

n

u

a

ry

1

9

9

5

J

a

n

u

a

ry

1

9

9

6

J

a

n

u

a

ry

1

9

9

7

J

a

n

u

a

ry

1

9

9

8

J

a

n

u

a

ry

1

9

9

9

J

a

n

u

a

ry

2

0

0

0

J

a

n

u

a

ry

2

0

0

1

J

a

n

u

a

ry

2

0

0

2

J

a

n

u

a

ry

2

0

0

3

J

a

n

u

a

ry

2

0

0

4

J

a

n

u

a

ry

0

5

10

15

20

25

30

35

40

Europe Rig Count Oil PriceRigs $/B


17/41


18/41


Oil Consumption in the UK Depreciation of the dollar increased consumption in

recent months.

Consumption declined sharply in the fourth quarter

of 2000 when the dollar appreciated relative to theSterling and the Euro.

Dollar devaluation has little impact on other

European countries because of high taxes onpetroleum products.

See the following Figure.


19/41


Oil Prices and

Petroleum Consumption in the UK

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

1999 January 2000 January 2001 January 2002 January 2003 January 2004 January

1400.00

1450.00

1500.00

1550.00

1600.00

1650.00

1700.00

1750.00

1800.00

1850.00

1900.00

1950.00

WTI ($) Brent () UK

Price


20/41


The Impact on Oil Producing Countries

Dollar Devaluation: Causes inflation Reduces purchasing power

Increases cost of operations if spare parts are

imported from Europe and Japan This would reduce upstream investment.

It will apply to US oil companies operating in OPEC.

See next 14 figures on the relationship between dollardevaluation and inflation in the oil producingcountries


21/41


Inflation and Oil Prices (Saudi Arabia)

0

20

40

60

80

100

120

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

-4

-3-2

-1

0

1

2

3

45

6

Dollar Index Inflation in SA

Gulf War

%$ Index


22/41


Inflation and Oil Prices (Oman)

0

20

40

60

80

100

120

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

-10

-8-6

-4

-2

0

2

4

6

8

10

12

Dollar Index Inflation In Oman

Gulf War

%$ Index


23/41


As the dollar increases, inflation

decreases: Saudi Arabia

Inflation and Dollar SA

-4

-3

-2

-1

0

1

2

3

4

5

6

60 70 80 90 100 110 120

%

$


24/41


OmanInflation and Dollar Oman

-10-8-6-4

-20246

81012

60 70 80 90 100 110 120

%


25/41


QatarInflation and Dollar Qatar

-2-101

23456

789

10

60 70 80 90 100 110 120

%


26/41


UAE

Inflation Dollar UAE

0

12

3

4

567

8

9

10

11

60 70 80 90 100 110 120

%


27/41


BahrainInflation Dollar Bahrain

-3

-2-1

0

1

2

3

4

5

60 70 80 90 100 110 120


28/41


Algeria

Inflation Alg

-50

5

10

15

20

25

30

35

60 70 80 90 100 110 120


29/41


IranInflation and Dollar Iran

0

10

20

30

40

50

60

60 70 80 90 100 110 120


30/41


Nigeria

Inflation Nigeria

0

1020

30

40

5060

70

80

60 70 80 90 100 110 120


31/41


Russia

Inflation Russia

-500

0

500

1000

1500

2000

60 70 80 90 100 110


32/41


Colombia

Inflation Colombia

05

10

15

2025

30

35

60 70 80 90 100 110 120


33/41


AngolaInflation Angola

-1000

0

1000

2000

3000

4000

5000

60 70 80 90 100 110 120


34/41


Observations1. The exchange rate-inflation effect declines as the

percentage of oil exports in total exports declines.

2. The relationship between dollar devaluation and

inflation in the oil producing countries does nothold if: The local currency is not pegged to the dollar

The economy is diversified

The dependence on oil is small

Norway, Indonesia, Gabon, and Mexico

Out of 18 oil producing countries, only four countries found not have aninverse relationship between the value of the dollar and inflation.


35/41


Loss of Purchasing Power The Following Figure shows OPEC basket

prices (red), prices adjusted for exchangerates (Green), and Prices adjusted forexchange rates and import prices (blue).

Losses due to import prices are much largerthan losses (some times gains) due to

exchange rates. OPEc should address import prices rather than

currency exchange rates!


36/41


Loss of Purchasing Power

10

15

20

25

30

35

40

J

u

l-9

0

J

a

n

-9

1

J

u

l-9

1

J

a

n

-9

2

J

u

l-9

2

J

a

n

-9

3

J

u

l-9

3

J

a

n

-9

4

J

u

l-9

4

J

a

n

-9

5

J

u

l-9

5

J

a

n

-9

6

J

u

l-9

6

J

a

n

-9

7

J

u

l-9

7

J

a

n

-9

8

J

u

l-9

8

J

a

n

-9

9

J

u

l-9

9

J

a

n

-0

0

J

u

l-0

0

J

a

n

-0

1

J

u

l-0

1

J

a

n

-0

2

J

u

l-0

2

J

a

n

-0

3

J

u

l-0

3

OPEC Basket Price Adjusted for Exchange Rates Adjusted for Infalt ion$/b


37/41


Loss of Purchasing Power The following two Figures show oil prices after

adjusting them for purchasing power (adjustedfor import prices and exchange rates) for threeOPEC members. The US real price of oil

(adjusted for US inflation) is added forcomparison.

OPEC members have different trading partners.Therefore, the effect of dollar devaluation differfrom one country to another.


38/41


Purchasing Power Oil Prices

0

2

4

6

8

10

12

14

16

18

19

77

19

78

19

79

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

Indonesia Venezuela UAE US


39/41


Real Oil Prices (constatnt 1970)

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

1975 1980 1985

Saudi Arabia

UAE

Kuwait

Libya

IndonesiaVenezuela

USA


40/41


Results Dollar depreciation reduces activities in upstream

through different channels including lower return oninvestment, increasing cost, inflation, and purchasing

power

Dollar devaluation increases demand in countries

with appreciated currencies because of increase in

purchasing power. Dollar devaluation increases demand in the US as

tourists prefer to spend their vacations in the US.


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