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29 comments on Oil Prices around the World: Do Exchange Rates Matter?
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29 comments on Oil Prices around the World: Do Exchange Rates Matter?
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Here's a graph of the Canadian dollar case going back a few more years. It graphs average monthly front-month Nymex contract converted to C$ using the average exchange rate for the month. (data points for Oct, of course, not available yet)
It clearly slows that so far from a Canadian standpoint the new highs are not that big of a deal. Oil was close to $80 in summer 2005 and it's not that much higher now 2 years later. Those new highs would be even less significant if adjusted for inflation.
Oil has yet to "break out" in Canadian dollar terms from it's trading range of the past few years.
Nymex futures prices from EIA:
http://tonto.eia.doe.gov/dnav/pet/pet_pri_fut_s1_d.htm
Canadian dollar data from Bank of Canada:
http://www.bankofcanada.ca/en/rates/exchform.html
I think that Canada and Norway are in the same boat small population large oil exports and appreciating currency.
But how has the internal cost of gasoline changed in Cananda ?
In CN vs USD.
I'd like to see gasoline costs vs oil price in each currency.
Try this link:
http://www.vancouvergasprices.com/retail_price_chart.aspx
Perfect timing. I'd be interested on your take on the whole "price of oil" vs. "dollar tanking" issue.
This is something that I actually get confused on. If the dollar let's say was $1.30 to the Euro 1 year ago now it is $1.40.
How does that effect the price of WTI in New York or Brent in London?
Explain exactly why the "cost" is actually higher or lower in one place or another.
This would really clear some stuff up for some people.
Think auctions.
Oil is priced in dollars. Assume that yesterday, the price of oil is the same as it was yesterday (e.g., $70). Assume you need 10 barrels - $700.
Finally, assume that today, the Euro appreciates against the dollar. One Euro buys more dollars today than it did yesterday ($1.40, vs. $1.30). What happens to the oil price?
Yesterday you needed (EUR)538,46 to buy your 10 barrels. But now you need fewer Euros to buy the same oil: (EUR)500,00. You save almost (EUR)40! If you get paid in Euros, it appears to you that oil is cheaper than it was or yesterday.
If EVERY major currency buys more dollars than it did last year, oil is cheaper everywhere than it was yesterday. Everywhere, that is, except the US, where the dollar price of oil is the same.
But if oil is cheaper, people can use more of it (and more people can use it). Some of those Europeans who are saving money on oil will do something to use their savings - and some of those activities will require more oil. They may go on a vacation (jet fuel? road trip?), or buy imported goods (transport).
Here's where the auction comes in. Oil goes to the highest bidder. In our scenario, Americans in the oil market are paying what they paid yesterday. Europeans, however, have that extra money to spend on energy - so they bid up the price of oil. Many Americans still need the oil for commuting, fertilizers, trucking, etc., so they pinch pennies (clip coupons, cancel Christmas, whatever) and spend more on oil than they did yesterday. Other Americans either can't afford to spend much more, or choose to conserve in the face of higher prices.
End result: dollar price of oil goes up. Europe gets more oil, America gets less.
----
I hope this answers your question.
As for the difference between Brent and WTI, both of those prices are in dollars. The difference has to do with the quality of the oil being contracted for (is it "sweet light", or a more "sour" crude?), and the transport costs to get the oil delivered to the designated market site.
Actually, don't think auction. There are physical restraints, from transport to storage to refinery capability which means that only a percentage of total oil production is available for any auction action. One reason that it looks like a bidding war today is that the amounts being bid are not large - a country like Kenya simply does not represent much in the way of tanker traffic.
However, the infrastructure simply does not exist to divert 2/3 of Great Britain's daily output to Italy, regardless of how much the Italians can pay for it.
Oil flows between regions, however there are limits - and those limits are ones that can only be overcome over a longer term with major capital. And considering the probable shrinking of the available oil volumes, it is not very likely that too many people will be doing it.
True for most probable scenarios. However, at some price, you could put UK oil on tankers to Italy.