Sunday, July 06, 2008

Exchange rates and oil prices

This post is mostly an informational post, and is kinda trigged by this post by Paul Krugman about the sky-rocketing of real oil prices.

Given the fact that oil prices are calculated in dollars, I couldn't help wonder how much the exchange rates affected the cost for those of us who lives in Europe. Or, said in a different way, I wondered if the free fall of the dollar compared to the euro, has insulated Europeans somewhat against the rising costs.

Well, there was only one way to find out - do some number crushing.

I got the oil prices from here (a page on the site for the Energy Information Administration), and I got the exchange rates from here.

What I did was taking the weekly prices for oil, and turn them into average monthly prices (by the basic means of adding the weekly prices together, and divide with the number of weeks in the month).

dollar per barrel of oil

The start of the graph is a bit misleading, as it only contains two months from 1995 and 1996. However, from 1997 onwards, all months are there, until June 2008.

As you can see the oil prices have had a general upwards trend, but it's only the last 1½ year that the prices have really taken off.

Then there is the dollar-euro exchange rate, which I found for the same months that I got the oil prices for. What I looked at was how many euro a dollar was worth in each of these months, and then I mapped it.

euro per dollar

As you can see, the dollar has become worth less compared to the euro in the same period as the oil has skyrocketed. That alone tells me that the price increase had affected the US more than the EU. However, for good measure, I calculated the oil prices in euro, and mapped this together with the dollar prices.

oil prices

As the graph shows, the exchange rate has somewhat protected Europeans against the skyrocketing of oil prices, even though Europeans have been heavily affected as well.

To illustrate this better, I've also made a figure that shows the change in prices compared to the prices in January 1997. I used this month because it was the first month after which all months were covered in the graph.

changes in oil prices

As you can see, oil prices in dollar, are more than five and a half times higher than they were in January 1997, while oil prices in euro are less than four and a half times higher.

This posses a big challenge for US economy if it wants to keep up with European economy.

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Blogger Chief said...

Very nice analysis. Europe also has invested in more public transportation and have dealt with artificially high energy prices for years. They will most likely be better equipped to deal with still higher prices.

Tragedy of the Commons

July 06, 2008 4:22 PM  

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