Today's Reuters story about the price of oil and the strength of the dollar reminded me of a theory I previously written about relating to the Iraq war and the dollar vs the euro. Briefly the theory postulated that invading Iraq was mostly about using Iraq oil reserves to bully OPEC into not pricing their oil in euros instead of dollars (something they have previously considered doing). The effect of them doing so would be devastating for the dollar and hence the USA. Countries around the world that hold very large reserves of dollars to purchase oil would then dump them and go to euros causing a massive devaluation of the dollar.
The thing is that compared to three years ago the dollar has already had a global devaluation of 30% or so against a basket of currencies (32% against the Euro) , something I've also written about before, and guess what? The price of oil has steadily increased from the mid $20 range to $40-something in the same time period. Obviously that's more than a 30% increase and many other factors like the invasion of Iraq would be having an influence, but I would not be at all surprised if there is at least some correlation. Maybe I just haven't been paying much attention but I haven't noticed anyone else relating the price of oil to the declining value of the dollar. Until today that is.
If as the Reuters article suggests, the value of the dollar really is a determining factor in the price of oil then it shows that OPEC is already at least partially pricing their oil based on other non-dollar currencies. Otherwise the value of the dollar would have no effect on the price of oil, right? Perhaps someone should be graphing the price of oil per barrel vs. the dollar-euro exchange rate and seeing what the degree of correlation between them is.
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