To lower oil price, boost the buck?
The weak dollar may push up energy prices by affecting supply, demand, and investor behavior.
For six years, the world has witnessed an intriguing phenomenon: Oil prices have soared as the US dollar has declined in value.
Now some economists say the simplest way to ease oil prices in the short term is to boost the value of the greenback.
It's a controversial idea. Clearly, oil prices are driven mainly by the fundamental trends of oil supply and demand. And even if an oil-dollar link does exist, economists say it's not clear that the dollar's downward trend can – or should – be reversed. Some say a weaker dollar is needed to help reverse America's large trade imbalance over time.
Still, with oil prices near record levels, concern about the dollar's dive is getting more attention.
"Increase the value of the dollar and lower the value of the euro. That by itself will lower [oil] prices, assuming all other things being equal," says A.F. Alhajji, an energy economist at Ohio Northern University in Ada. Beyond that, he says, the world will basically need to wait for market forces to adjust supply and demand.
If a steadier dollar would help, one positive sign is that the greenback has firmed up a bit in the past three months. But it's not clear how much it would need to rise – or how long it would take after that – to influence oil prices.
Algerian Energy Minister Chakib Khelil, the current president of the Organization of Petroleum Exporting Countries, said Thursday that the dollar is playing a major role in oil prices, and offered a hard estimate, according to a report by Marketwatch. At a meeting in Paris, he said a drop of 1 to 2 percent in the dollar versus the euro could add another $8 a barrel to oil prices.
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