The Weak Dollar Does Not Support Higher Energy Prices!!!!!

The pricing of oil in dollars creates an incredible amount of confusion among people who should know better. For example, USA Today tells us that: "how long the weak dollar can support energy prices, if demand is still weak, remains to be seen."

This one deserves a big "huh?" If the dollar falls in value against other currencies, then other things equal, oil should rise in price measured in dollars. That would be necessary to keep it from falling in price measured in euros, yen, and everything else. If the dollar is falling in value against other currencies, then the dollar price of oil must rise just to keep it constant measured against other currencies. So even with some weakening of demand for oil, we should expect the dollar price to rise, if the dollar continues to fall.

It is also worth noting that oil is not necessarily sold for dollars. If the Saudi government signs a contract to sell oil to a European, Japanese, or Brazilian firm, it can agree to accept any currency it chooses. Generally this trade is done in dollars, but there is no rule that requires the trade take place in dollars and often it does not.

--Dean Baker

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