dollar and oil
TRANSCRIPT
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A. F. Alhajji. July 2004 1
The Impact of Dollar Devaluation
on World Oil Industry:Do Exchange Rates Matter?
A. F. Alhajji, Ph.D.
Associate Professor
College of Business Administration
Ohio Northern university
Ada, Oh, 45810
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A. F. Alhajji. July 2004 2
Outline Introduction
The Impact of Exchange Rates on Supply Exchange Rates and Drilling Activities
Exchange Rates and Production
Exchange Rates and Exports
Exchange Rates and Purchasing Power Exchange Rates and Inflation
The Impact of Exchange Rates on Demand The direct impact The indirect impact
Empirical Evidence
Conclusions
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A. F. Alhajji. July 2004 4
Observations Oil Prices are high only in dollars but they are
relatively low in other currencies, especially
the Euro and the yen.
See the four figures below
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A. F. Alhajji. July 2004 5
Oil Prices in Dollar and Euro
8
13
18
23
28
33
38
43
1/4/1999
4/4/1999
7/4/1999
10/4/1999
1/4/2000
4/4/2000
7/4/2000
10/4/2000
1/4/2001
4/4/2001
7/4/2001
10/4/2001
1/4/2002
4/4/2002
7/4/2002
10/4/2002
1/4/2003
4/4/2003
7/4/2003
10/4/2003
1/4/2004
4/4/2004
WTI ($) Brent ()$&/b
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A. F. Alhajji. July 2004 6
Oil Prices Dollar and Yen
0
5
10
15
20
25
30
35
40
1973-10-01
1974-10-01
1975-10-01
1976-10-01
1977-10-01
1978-10-01
1979-10-01
1980-10-01
1981-10-01
1982-10-01
1983-10-01
1984-10-01
1985-10-01
1986-10-01
1987-10-01
1988-10-01
1989-10-01
1990-10-01
1991-10-01
1992-10-01
1993-10-01
1994-10-01
1995-10-01
1996-10-01
1997-10-01
1998-10-01
1999-10-01
2000-10-01
2001-10-01
2002-10-01
2003-10-01
01000
2000
3000
40005000
6000
7000
8000
9000
10000
$ Oil Price Oil Price$/b /b
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A. F. Alhajji. July 2004 7
Oil Prices in Dollar and DM
0
10
20
30
40
50
60
70
80
90
100
O
ct-73
O
ct-74
O
ct-75
O
ct-76
O
ct-77
O
ct-78
O
ct-79
O
ct-80
O
ct-81
O
ct-82
O
ct-83
O
ct-84
O
ct-85
O
ct-86
O
ct-87
O
ct-88
O
ct-89
O
ct-90
O
ct-91
O
ct-92
O
ct-93
O
ct-94
O
ct-95
O
ct-96
O
ct-97
O
ct-98
O
ct-99
O
ct-00
O
ct-01
O
ct-02
O
ct-03
$ Oil Price DM Oil Price
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A. F. Alhajji. July 2004 8
Oil Prices in Dollar and Sterling
0
5
10
15
20
25
30
35
40
O
ct-73
O
ct-74
O
ct-75
O
ct-76
O
ct-77
O
ct-78
O
ct-79
O
ct-80
O
ct-81
O
ct-82
O
ct-83
O
ct-84
O
ct-85
O
ct-86
O
ct-87
O
ct-88
O
ct-89
O
ct-90
O
ct-91
O
ct-92
O
ct-93
O
ct-94
O
ct-95
O
ct-96
O
ct-97
O
ct-98
O
ct-99
O
ct-00
O
ct-01
O
ct-02
O
ct-03
$ Oil Price Oil Price$//b
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A. F. Alhajji. July 2004 9
Results Dollar devaluation reduces oil supply and increases oil
demand. Dollar devaluation reduces drilling activties in some areas
such as the North Sea.
Dollar devaluation reduces drilling activities in the oilproducing countries. It reduces their purchasing power andcauses inflation.
Dollar devaluation increases oil demand in Europe and Japan
Dollar devaluation increases oil demand in the US as UStourists spend their vacations in the US instead of Europe.
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A. F. Alhajji. July 2004 10
Observations on Drilling Activities Drilling activities are highly correlated with
oil prices
There is a lag when prices increase. No lag
when prices decrease. Changes in the world rig count are
misleading. They follow changes in US. This pattern does not hold in recent months.
Is it because of dollar devaluation?
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A. F. Alhajji. July 2004 11
Observations on Drilling Activities Drilling activities in the Middle East and Latin
America are highly correlated with oil prices in USdollars
Drilling activities in Europe are positively correlatedwith oil prices in Euro and negatively correlated with
oil prices in US dollars. As prices in Euro decrease
(lower dollar), rig count decreases. As the dollargoes down, rig count goes down
See the following six figures.
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Oil Prices and Rig Count
500
1500
2500
3500
4500
5500
6500
1975January
1976January
1977January
1978January
1979January
1980January
1981January
1982January
1983January
1984January
1985January
1986January
1987January
1988January
1989January
1990January
1991January
1992January
1993January
1994January
1995January
1996January
1997January
1998January
1999January
2000January
2001January
2002January
2003January
2004January
0
5
10
15
20
25
30
35
40
U.S. World Oil Price
Rigs $/B
Price
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A. F. Alhajji. July 2004 13
Oil Prices ($) and Rig Count
(Latin America)
0
100
200
300
400
500
600
1975January
1976January
1977January
1978January
1979January
1980January
1981January
1982January
1983January
1984January
1985January
1986January
1987January
1988January
1989January
1990January
1991January
1992January
1993January
1994January
1995January
1996January
1997January
1998January
1999January
2000January
2001January
2002January
2003January
2004January
0
5
10
15
20
25
30
35
40
Latin America Oil Price$/bRigs
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A. F. Alhajji. July 2004 14
Oil Prices and Rig Count
(Middle East)
0
50
100
150
200
250
300
1975
January
1976
January
1977
January
1978
January
1979
January
1980
January
1981
January
1982
January
1983
January
1984
January
1985
January
1986
January
1987
January
1988
January
1989
January
1990
January
1991
January
1992
January
1993
January
1994
January
1995
January
1996
January
1997
January
1998
January
1999
January
2000
January
2001
January
2002
January
2003
January
2004
January
0
5
10
15
20
25
30
35
40
M East Oil PriceRigs $
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A. F. Alhajji. July 2004 15
Rig Count: World-US, US, Vs. Oil Prices
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
1975January
1976January
1977January
1978January
1979January
1980January
1981January
1982January
1983January
1984January
1985January
1986January
1987January
1988January
1989January
1990January
1991January
1992January
1993January
1994January
1995January
1996January
1997January
1998January
1999January
2000January
2001January
2002January
2003January
2004January
0
5
10
15
20
25
30
35
40
World-US U.S. Oil Price
Rigs $/b
Price
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A. F. Alhajji. July 2004 16
Oil Prices ($) Vs Rig Count in Europe
0
50
100
150
200
250
300
1
9
7
5
J
a
n
u
a
ry
1
9
7
6
J
a
n
u
a
ry
1
9
7
7
J
a
n
u
a
ry
1
9
7
8
J
a
n
u
a
ry
1
9
7
9
J
a
n
u
a
ry
1
9
8
0
J
a
n
u
a
ry
1
9
8
1
J
a
n
u
a
ry
1
9
8
2
J
a
n
u
a
ry
1
9
8
3
J
a
n
u
a
ry
1
9
8
4
J
a
n
u
a
ry
1
9
8
5
J
a
n
u
a
ry
1
9
8
6
J
a
n
u
a
ry
1
9
8
7
J
a
n
u
a
ry
1
9
8
8
J
a
n
u
a
ry
1
9
8
9
J
a
n
u
a
ry
1
9
9
0
J
a
n
u
a
ry
1
9
9
1
J
a
n
u
a
ry
1
9
9
2
J
a
n
u
a
ry
1
9
9
3
J
a
n
u
a
ry
1
9
9
4
J
a
n
u
a
ry
1
9
9
5
J
a
n
u
a
ry
1
9
9
6
J
a
n
u
a
ry
1
9
9
7
J
a
n
u
a
ry
1
9
9
8
J
a
n
u
a
ry
1
9
9
9
J
a
n
u
a
ry
2
0
0
0
J
a
n
u
a
ry
2
0
0
1
J
a
n
u
a
ry
2
0
0
2
J
a
n
u
a
ry
2
0
0
3
J
a
n
u
a
ry
2
0
0
4
J
a
n
u
a
ry
0
5
10
15
20
25
30
35
40
Europe Rig Count Oil PriceRigs $/B
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A. F. Alhajji. July 2004 18
Oil Consumption in the UK Depreciation of the dollar increased consumption in
recent months.
Consumption declined sharply in the fourth quarter
of 2000 when the dollar appreciated relative to theSterling and the Euro.
Dollar devaluation has little impact on other
European countries because of high taxes onpetroleum products.
See the following Figure.
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A. F. Alhajji. July 2004 19
Oil Prices and
Petroleum Consumption in the UK
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
1999 January 2000 January 2001 January 2002 January 2003 January 2004 January
1400.00
1450.00
1500.00
1550.00
1600.00
1650.00
1700.00
1750.00
1800.00
1850.00
1900.00
1950.00
WTI ($) Brent () UK
Price
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A. F. Alhajji. July 2004 20
The Impact on Oil Producing Countries
Dollar Devaluation: Causes inflation Reduces purchasing power
Increases cost of operations if spare parts are
imported from Europe and Japan This would reduce upstream investment.
It will apply to US oil companies operating in OPEC.
See next 14 figures on the relationship between dollardevaluation and inflation in the oil producingcountries
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A. F. Alhajji. July 2004 21
Inflation and Oil Prices (Saudi Arabia)
0
20
40
60
80
100
120
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
-4
-3-2
-1
0
1
2
3
45
6
Dollar Index Inflation in SA
Gulf War
%$ Index
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A. F. Alhajji. July 2004 22
Inflation and Oil Prices (Oman)
0
20
40
60
80
100
120
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
-10
-8-6
-4
-2
0
2
4
6
8
10
12
Dollar Index Inflation In Oman
Gulf War
%$ Index
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A. F. Alhajji. July 2004 23
As the dollar increases, inflation
decreases: Saudi Arabia
Inflation and Dollar SA
-4
-3
-2
-1
0
1
2
3
4
5
6
60 70 80 90 100 110 120
%
$
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A. F. Alhajji. July 2004 24
OmanInflation and Dollar Oman
-10-8-6-4
-20246
81012
60 70 80 90 100 110 120
%
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A. F. Alhajji. July 2004 25
QatarInflation and Dollar Qatar
-2-101
23456
789
10
60 70 80 90 100 110 120
%
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A. F. Alhajji. July 2004 26
UAE
Inflation Dollar UAE
0
12
3
4
567
8
9
10
11
60 70 80 90 100 110 120
%
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A. F. Alhajji. July 2004 27
BahrainInflation Dollar Bahrain
-3
-2-1
0
1
2
3
4
5
60 70 80 90 100 110 120
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A. F. Alhajji. July 2004 28
Algeria
Inflation Alg
-50
5
10
15
20
25
30
35
60 70 80 90 100 110 120
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A. F. Alhajji. July 2004 29
IranInflation and Dollar Iran
0
10
20
30
40
50
60
60 70 80 90 100 110 120
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A. F. Alhajji. July 2004 30
Nigeria
Inflation Nigeria
0
1020
30
40
5060
70
80
60 70 80 90 100 110 120
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A. F. Alhajji. July 2004 31
Russia
Inflation Russia
-500
0
500
1000
1500
2000
60 70 80 90 100 110
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A. F. Alhajji. July 2004 32
Colombia
Inflation Colombia
05
10
15
2025
30
35
60 70 80 90 100 110 120
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A. F. Alhajji. July 2004 33
AngolaInflation Angola
-1000
0
1000
2000
3000
4000
5000
60 70 80 90 100 110 120
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A. F. Alhajji. July 2004 34
Observations1. The exchange rate-inflation effect declines as the
percentage of oil exports in total exports declines.
2. The relationship between dollar devaluation and
inflation in the oil producing countries does nothold if: The local currency is not pegged to the dollar
The economy is diversified
The dependence on oil is small
Norway, Indonesia, Gabon, and Mexico
Out of 18 oil producing countries, only four countries found not have aninverse relationship between the value of the dollar and inflation.
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A. F. Alhajji. July 2004 35
Loss of Purchasing Power The Following Figure shows OPEC basket
prices (red), prices adjusted for exchangerates (Green), and Prices adjusted forexchange rates and import prices (blue).
Losses due to import prices are much largerthan losses (some times gains) due to
exchange rates. OPEc should address import prices rather than
currency exchange rates!
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A. F. Alhajji. July 2004 36
Loss of Purchasing Power
10
15
20
25
30
35
40
J
u
l-9
0
J
a
n
-9
1
J
u
l-9
1
J
a
n
-9
2
J
u
l-9
2
J
a
n
-9
3
J
u
l-9
3
J
a
n
-9
4
J
u
l-9
4
J
a
n
-9
5
J
u
l-9
5
J
a
n
-9
6
J
u
l-9
6
J
a
n
-9
7
J
u
l-9
7
J
a
n
-9
8
J
u
l-9
8
J
a
n
-9
9
J
u
l-9
9
J
a
n
-0
0
J
u
l-0
0
J
a
n
-0
1
J
u
l-0
1
J
a
n
-0
2
J
u
l-0
2
J
a
n
-0
3
J
u
l-0
3
OPEC Basket Price Adjusted for Exchange Rates Adjusted for Infalt ion$/b
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A. F. Alhajji. July 2004 37
Loss of Purchasing Power The following two Figures show oil prices after
adjusting them for purchasing power (adjustedfor import prices and exchange rates) for threeOPEC members. The US real price of oil
(adjusted for US inflation) is added forcomparison.
OPEC members have different trading partners.Therefore, the effect of dollar devaluation differfrom one country to another.
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A. F. Alhajji. July 2004 38
Purchasing Power Oil Prices
0
2
4
6
8
10
12
14
16
18
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
Indonesia Venezuela UAE US
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A. F. Alhajji. July 2004 39
Real Oil Prices (constatnt 1970)
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
1975 1980 1985
Saudi Arabia
UAE
Kuwait
Libya
IndonesiaVenezuela
USA
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A. F. Alhajji. July 2004 40
Results Dollar depreciation reduces activities in upstream
through different channels including lower return oninvestment, increasing cost, inflation, and purchasing
power
Dollar devaluation increases demand in countries
with appreciated currencies because of increase in
purchasing power. Dollar devaluation increases demand in the US as
tourists prefer to spend their vacations in the US.
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