Alexander Mercouris — Debunking Popular Oil Price Myths

The recent fall in oil prices has attracted a great deal of attention. There has been speculation about possible collusion between the Saudis and the Americans to bring it about.

There has been wild talk of this being a conspiracy by the Saudis and Americans directed against countries like Russia and Iran that are frequently considered their enemies. Alternatively, lower oil prices are said to be a Saudi plot to throttle the US shale oil and gas industries.

The history of oil prices over the last century shows that the recent fall in oil prices almost certainly has nothing to do with such theories, but is the product of more impersonal factors. 

Oil prices are driven primarily by two factors: (1) international supply and demand for oil, which remains the lifeblood of the modern industrial economy, and (2) the value of the dollar, the currency in which oil is priced. 

Since dollars buy oil, if the value of the dollar is high against other currencies, then fewer dollars buy more oil even if the cost of oil priced in other currencies remains unchanged. Conversely, if the dollar’s value depreciates, then more dollars are needed to buy the same amount of oil. Oil price fluctuations therefore may not always reflect its cost when priced in other currencies. 

However, since oil is paid for in dollars, it has traditionally been an inflation hedge for international investors holding large amounts of dollars, especially when the currency is depreciating.

This tends to make the price of oil rise even more in periods of dollar weakness.

Accordingly, these same investors also tend to be the first to sell oil whenever the dollar strengthens against other currencies (as is happening now). This, of course, adds to the downward pressure on the price of oil.…

Russia Insider
Debunking Popular Oil Price Myths
Alexander Mercouris