The Corner

Petro Dollar Bleg

Lots of folks say (correctly) that even if we started drilling right now it wouldn’t improve the supply, and therefore the price, of gas for a long time. One common response to this is that a commitment to drill would help pop the speculative oil bubble we’re in. I find that argument persuasive, but I think it’s crazy to predict with any accuracy how much of an effect it would have.

What I haven’t seen, however, is anything on the effect such a policy announcement would have on the value of the dollar. If we opened ANWR and the coasts to drilling, we would improve our trade imbalance by billions. Presumably this would make the dollar a more attractive currency, right? And if the value of the dollar went up, doesn’t it follow that the cost of oil and even gasoline would go down? If anyone’s seen anything good on this point, pro or con, I’d love to read it.

Update: Martin Feldstein takes a stab at the issue here. An excerpt:

The thinking behind the question of whether oil would cost less today if it were priced in euros seems to be that, since the dollar has fallen relative to the euro, this would have contained the rise in the price of oil.

In reality, the currency in which oil is priced would have no significant or sustained effect on the price of oil when translated into dollars, euros, yen, or any other currency.

Here is why. The market is now in equilibrium with the price of oil at US$120. That translates into 75 euros at the current exchange rate of around US$1.60 per euro. If it were agreed that oil would instead be priced in euros, the quoted market-equilibrating price would still be 75 euros and therefore US$120.

Any lower price in euros would cause an excess of global demand for oil, while a price above 75 euros would not create enough demand to absorb all of the oil that producers wanted to sell at that price.

Of course, the rate of increase of the price of oil in euros during the past year was lower than the rate of increase in dollars. The euro price of oil last May was 48 euros, or 56 percent below its current price.

But that would be true even if oil had been priced in euros.

Update II: I excerpted the wrong part. See here.


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