A commenter wrote in another thread
Can we talk about the media coverage on OPEC and oil prices? I'm not sure anything has happened recently except the fall of the dollar. But none of the major media outlets are discussing whether oil prices have effectively changed in euros or any other currency. This just kind of pisses me off. Even the president of OPEC referred to the drop in the dollar, but none of the media seemed to pick up on that and do any analysis.
Well, I happened to have discussed something along these lines with a good friend of mine who is far more knowledgeable about economics than me. So, I asked him to share his thoughts. Here's what he wrote.
As u can see above, while oil prices have increased 226% from 2003 to 2008, the price of the Euro, in U.S. Dollars, has increased by 30%. So no, Europeans are not paying the same amount in Euros for oil today as they did in 2003 or, for that matter, only a year ago.
There are various theories as to why oil prices have seen such a dramatic increase over the last several years. I would argue there are five reasons worth highlighting here.
1) Yes, as long as oil is denominated in dollars and the dollar weakens relative to other currencies, there will be that marginal impact on the price of oil. However, this accounts for only a part of the overall movement in the price of oil.
2) As long as emerging market economies the size of India, China, Brazil, and Russia develop at a rate that is 2 to 4 times that of U.S. GDP growth, demand for oil will continue to increase ahead of supply, driving the price of oil higher (you can google the rate of oil supply growth to compare it to the rate of demand growth if you're really interested).
3) As the price of oil has increased, so has demand from investors, both retail and institutional. Oil futures contracts are now finding their way into Average Joe's brokerage account via direct contracts or an oil ETF or a newly created commodities mutual fund. Of course, demand from alternative hedge funds and the like has increased exponentially since 2003. More recently, chaos in credit markets and weakness in equity markets have driven more money into the commodities markets. I wouldn't be surprised if these "investors" aren't behind as much as a third, if not more, of the increase in oil prices.
4) U.S. oil companies and stand-alone refiners did not build much additional refining capacity during the 90s when oil was cheap and it wasn't "worth it" for them to add refining capacity. Lo and behold, as the price of oil has increased since 2000, not much refining capicity has been added. Hmmmmm....
5) During the Clinton adminstration, when the price of oil increased a couple of percentage points, Bill would summon an OPEC meeting at the White House and threaten to release the U.S.' Strategic Oil reserves, which would promptly bring the price of oil back down. In the 90s, this effectively put a cap on the price of oil. Conversely, when asked what he thought of $4/gallon gasoline, President Bush answered, "$4/gallon gasoline? Wow! I didn't know that."
Hope you're happy for making me stay an extra hour at work.