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To lower oil price, boost the buck?

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The dollar-oil issue also came up Wednesday in a congressional hearing on whether high fuel prices are a bubble or a "new reality."

"While the correlation does not hold week in and week out, we believe that this trend – a falling dollar contributing to higher oil prices – is very strong," Daniel Yergin of Cambridge Energy Research Associates told senators.

Economists who see a dollar-to-oil link say it's operating through several channels, some long term and some short term:

A supply effect: The fact that oil is priced in a single currency worldwide – the US dollar – has significant effects on companies and nations that produce oil, Professor Alhajji says.

A rising price of oil has clearly brought billions in extra profits. But since the dollars that producers receive have gone down in value, that windfall has been partially offset.

As a result, he says, the oil-rich nations have probably been investing less in new oil production than they would have under a stable dollar.

Some analysts cast the impact on oil production in investment terms: If a nation's immediate economic needs are being met, why swap an asset that's rising in value (oil reserves) for one that's falling (dollars)?

A demand effect: Oil prices have been rising for consumers around the world. But this, too, has been partially offset in many nations by changes in currency rates. Europeans are buying more oil than they would if the US dollar were their currency.

"Because the dollar can't fall against the [government-managed] Asian currencies, it falls too much against the euro," says Peter Morici, an economist at the University of Maryland in College Park. "That gives Europeans more" to spend on oil.

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