EMF OP 20: The U.S. Dollar and the World Oil Market

Abstract: 

Due to the increasing value of the dollar, world oil prices rose rather than fell relative to the price of OECD exports between 1980 and 1984. The real crude oil price for OECD countries increased approximately 30 percent more than its counterpart for the U.S. If OECD oil prices had not risen but followed the trend for U.S. prices, world oil demand in 1984 would have been about 3.0 million barrels per day (6.6%) higher than otherwise, according to estimates presented in this paper. <br /><br />Different projections of the future value of the dollar can introduce substantial uncertainty for world oil market trends. The paper considers two plausible scenarios, which assume the same nominal oil price, U.S. inflation rate, and OECD growth rate. World oil consumption in 1990 could vary by 4 MMBD, depending upon shifts in the exchange rates and the value of the dollar. This variation is comparable to the range associated with significant differences in the economic growth between now and 1990. <br /><br />These developments could also eventually influence the dollar-dominated crude oil price. We show that shifts in exchange rates could produce changes in oil prices in 1990 that are comparable to the effects of gradually removing 5 million barrels per day from total oil production by 1990.&nbsp;Reprinted in 1985 from <em>Energy Policy</em>, 1986