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December 14, 2007

The dollar and oil prices

Oil prices have been rising while the dollar's international value has been falling. In fact, both recently set records, with oil establishing a record high and the dollar's value hitting a 4-year low. Some people say there's a connection between the two. Is there? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"The alleged connection is this: They say that since much of the world uses the dollar as a defacto currency, and, in fact, in many countries, many in the Middle East, the currency is tied to the value of the dollar. As the dollar's value has gone down, that makes the revenues that they are getting from selling oil, for example, lower, and they have had to increase the price of oil to compensate. And so the connection, therefore, is that as the dollar's value is down, oil prices are up, and it is really the lower valued dollar that's really pushing oil prices up.

"Now, if we look at the facts though, the facts don't really bare that out. For example, since late August when we had the big surge in oil, oil prices are up 40 percent, but the value of the dollar against major currencies is only down 9 percent. Or another statistic, since the late '90s, oil prices are up 900 percent, but the dollar's value against major currencies is only down 33 percent. So I think the answer here is that, yes, the lower value dollar can play some role in causing oil prices to go up, but there are many, many other factors that are much more important."

Posted by Dave at December 14, 2007 08:00 AM