OIL PRICES
but we saw the dollar moved sharply lower and that pushed up your domestic prices,” said Milne.“And not only that, but when you have a weakening currency your investors will look to assets that will hold or gain value over time.So if you think you can hold it in dollars and the dollar is going to weaken that is not good.You want some- thing that will preserve that cash, actually make money on it,and commodities were seen as a good way of doing that.”The lat- ter issue noted by Milne will be discussed in greater detail in part two of this article. The value of the dollar can also have
some global demand-related impacts.“The relationship between the value of the dol- lar and oil prices is very complex,”said EIA’s Lidderdale.“There is the fundamental the- ory that as the value of the dollar declines, relative to the Euro,oil essentially becomes cheaper in Europe because they are buy- ing it in dollars and selling it in Euros.And because the price is lower,demand goes up in Europe and therefore the price has to globally increase to restrain demand else- where and maintain a balance.” Lidderdale noted that the estimated
impact of this demand factor is relatively small.He also outlined how U.S. domestic economic policy has impacted the price of oil from a demand standpoint.“As the U.S. economy is stimulated through monetary
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policy,because China maintains a relatively fixed exchange rate with the United States that stimulus is transmitted overseas,” he said.“A stimulus to the U.S. economy is also a stimulus to the Chinese economy and that growth in demand translates into a growth in crude oil demand,which pushes oil prices up.And the rise in oil prices for other reasons can affect the value of the dollar as it effects a change in relative asset valuation between oil-producing economies and oil consuming economies. So over the long run there is definitely a relationship between the value of oil and the value of the dollar.” This wraps up the case generally pre-
sented by the investment banks, some mainstream economic and political pundits and to some extent the EIA that significant global supply and demand factors prima- rily drive current oil prices and the resulting prices of refined products. In part two we will present the case that these factors,even should they be accurate long-term assess- ments of the market dynamics, cannot account for the extraordinary increases in oil prices since roughly 2005.While much has changed in the world relative to the phys- ical product, similar and extraordinary changes have occurred relative to the play- ers in the futures markets and the rules under which they operate. l FON
APRIL 2011 | FUEL OIL NEWS | www.fueloilnews.com
