Impact of Dollar Devaluation on World Oil Industry

Essay by stratedgeUniversity, Master's October 2009

download word file, 14 pages 0.0

The role of the dollar as the key global currency has a biased effect on the price of imports and U.S. rates of inflation because most primary products have their prices quoted in world markets in dollar terms. Crude oil is no exception and Organizations of Petroleum Exporting Countries (OPEC) members price their oil in US dollars and it is the preferred currency in the global crude oil trade for over 35 years. Dollar devaluation creates several problems for the world oil industry. The objective of this paper is to examine the role of changes in the U.S. Dollar (Dollar) exchange rate and its impact on the world oil industry. The paper aims to address the qualitative analysis of the followingImpact of exchange rates on oil supply by analyzing the followingoDrilling activitiesoOil productionoPurchasing power and inflationImpact of exchange rates on demand of oiloDirect and indirect impact on demand.

Oil-exporting countries receive oil revenues in dollars (or their euro equivalent), and they use different currencies to import goods and services from various countries.

Any change in the exchange rate of the dollar affects the purchasing power of these countries, and therefore their real income. Impact of dollar devaluation would be different from one country to another as each country has a different trade pattern. International oil companies sell their crude oil in dollars, but they operate in various countries and pay some of their costs in local currencies. Any change in the value of the dollar therefore affects their cost structure and profitability.

Dollar depreciation reduces the purchasing power and in turn increases domestic inflation levels of oil producing counties. In turn, it affects reinvestment in exploration, development, and maintenance.

The end consumers however use to the local currency to buy petroleum products. In the event of dollar devaluation, consumers in...