Historical Changes in U.S. Dollar Exchange Rate and Real Value of Oil

William D. DeMis

Oil prices relative to world currencies are now at unprecedented lows, as shown by a price analysis that incorporates the effect of U.S. dollar exchange rates on the value of oil. A commodity-based analysis corroborates this exchange-rate analysis. The value of oil today on world markets is even below its 1969 level (the nadir of the previous oil "bust").

The inflation-corrected price of oil (using the producer price index) in the U.S. has increased 130% since 1969. However, the U.S. dollar has lost over 40% of its value relative to G-7 currencies since abandonment of the Bretton Woods agreement in 1971. Therefore, the real value of oil on international markets is 20% below its 1969 level. Since 1988 alone, the dollar has lost 16% relative to the G-7 currencies. Oil producing countries are taking extreme revenue cuts caused by the eroding U.S. dollar.

Gold provides a standard measure of a currency's strength. The value of oil has dropped relative to gold. In 1969, one ounce of gold bought 11.50 barrels of oil in dollars of the day. Today, one ounce of gold buys 20 barrels of oil.

The 1990s may be a repeat of the 1960s. From 1960 to 1972, real oil prices on the international market decreased by 25%, thereby setting the stage for the 1970s price increases. Since 1988, real oil prices on the international market have dropped 20%, but oversupply prevents offsetting price increases. Near term, prices will drop further when Iraq resumes production. Attempts to shore up prices will falter, much as the completely forgotten Arab oil embargo of 1967 failed because of excessive supply. Towards the end of this decade, as global oil demand catches up with supply, there will be extreme pressure on oil producing countries to steeply raise prices to "correct" for the dollar's drop, or possibly even abandon the U.S. dollar as the basis for oil pricing.

AAPG Search and Discover Article #91019©1996 AAPG Convention and Exhibition 19-22 May 1996, San Diego, California