Dollar Wrecking Barrel
Assessing the effect of the surging greenback on the relative price and affordability of crude oil
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The rapidly appreciating US dollar is continually cited as a direct threat to the affordability of oil for already-strained global energy consumers—but this claim is rarely contextualized or parameterized.
No doubt, the strong dollar has been a headwind for crude prices: there is a measurable, nearly double-digit $/bbl impact when we look at the dollar-agnostic effective oil consumer-weighted equivalent (hereafter the CWE) price of Brent.
The dollar runup initially further eroded consumer affordability as oil rallied for very oil-related reasons through the first half of 2022 and has blunted some of the effective retreat of those crude prices since June.
In the simplest terms, the strength of the US dollar reflects troubling market conditions across most of the world’s oil consuming nations; the greenback also benefits from being an acute safe-haven demand during periods of economic or political tumult (i.e., now).
Briefly, there has also been a notable producer benefit to this dollar runup: Canadian producers have benefitted from an inflated realized CAD price of crude while Russian exporters face depressed realized local currency prices.
The US dollar is experiencing one of its strongest runs on record—and you’ll find no shortage of hand-waving commentary declaring the strong dollar as a headwind for crude prices and an added burden for already-strained global energy consumers.
Now, historically, a strong dollar means bad things for the price of commodities because most of them happen to be priced in US dollars. But, for the first half of the year, both crude and the greenback rallied together and each reached multi-decade highs. It wasn’t until June that they once again parted ways as oil prices began falling back.
Given the concurrent confluence of oil market strains (ongoing supply deficit, plunging inventories, sluggish US shale, and then the Russia shock), this post aims to untangle the role of the US dollar in contributing to, or blunting, crude’s rollercoaster of a year. Despite the seemingly unanimous headlines above, it’s hard to find an estimate of exactly how much dollar strength has reduced the $/bbl price of a barrel of oil that we see on the screen. This exercise is made doubly difficult given that lack of an appropriate, oil-metric based US dollar index with which to calculate currency impacts.
So, I took it upon myself to find out, specifically, how much: how much worse did the dollar make the early-2022 rally and how much did it contribute to oil’s fallback since the June high.