What’s Up with Oil Prices?

  • Written by David
  • March 11, 2008 at 6:59 am
  • 0
  • To be sure we all are experiencing higher oil prices! Demand from emerging economies has been one of the quoted factors in recent time. But note that oil is now serving as a store of value, as in a mock currency, because of the US dollar’s drop.

    According to an article in the Financial Times yesterday on Canadian oil sands, about 80% of the world’s oil is held in the hands of foreign national governments. These governments are paid in US Dollars for the sale of their oil. As the dollar falls, so does the value of a barrel of oil sold by these governments once they convert US Dollars back into their local currency. Hence the increase in oil prices, to some degree, to offset the fall of the dollar.

    An article from the BBC does a good job of explaining this idea in greater detail….

    Click title to read the article: Oil sets fresh record above $109

    quotes from the article:

    Tuesday, 11 March 2008, 11:58 GMT

    Oil sets fresh record above $109
    The cost of petrol is soaring around the world
    The price of crude oil has set a fresh record at $109.20, its fifth day in a row of historic highs.

    Recent rises are being attributed to the falling value of the US dollar against the Japanese yen and the euro.

    Some investors are buying oil, which is seen keeping its value, to protect themselves against the weaker dollar.

    Analysts are predicting that the dollar will weaken further if interest rates are cut again on 18 March.

    ….Another factor pushing up prices was last week’s decision by the Opec group of oil producing nations to keep output unchanged, despite rising demand for crude in China.

    At the same time, the dollar has fallen to new lows against the euro and other key currencies, and was hit again on Friday by a US employment report showing the labour market was at its weakest in five years.

    This prompted traders to seek refuge in commodities, including oil and gold, which are more likely to sustain their value than the US currency.

    Thanks for reading.

 

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