How Weak Dollar Affects OPEC

From the October 2007 Trumpet Print Edition

When oil price spikes have occurred in the past, the Organization of the Petroleum Exporting Countries has quickly increased supply, taking advantage of the high U.S. dollar selling price, but also thereby eventually driving down the oil price, making Americans and everyone else who uses oil happy.

But now, even with oil prices nearing a record high, opec is not stepping up production. Why?

The answer partly has to do with the weakening U.S. dollar. Today, even when the price-per-barrel goes up for Americans, opec makes less of a killing than it has in the past because the real value of the dollar is falling and, thus, so are opec’s real profits.

On July 23, the dollar fell to an all-time low against the euro and to a 26-year low against the pound. On the U.S. Dollar Index, the dollar has fallen below 80 and to the lowest levels since the index’s creation by the Federal Reserve Bank 34 years ago. This makes it hard on opec since it gets paid in dollars for its oil.

Despite prices being near all-time highs for Americans, opec calculations show that its oil prices have fallen over the past year when inflation and the weakening dollar are factored in.

“The adjusted ‘opec basket price’ averaged only $43.60 a barrel in June compared with $44.30 a barrel in the same month last year, according to the organization’s latest monthly report” (Financial Times, July 23).

Three months ago, opec President Mohamed Bin Dhaen al Hamli said that opec countries were “concerned about the continuing weakness of the U.S. dollar” because it was “having a significant effect on the purchasing power of oil-producing countries” (ibid.). Much of opec’s trade is with Europe, denominated in euros and pounds, which have rapidly risen in value against the dollar.

Although oil prices may be near records in America, the rest of the world has not seen the prices rise as dramatically in their own currencies. Since opec maintains that in real terms its oil prices are actually falling, it has no economic incentive to increase oil production, which would only lower oil prices further.

As long as the U.S. dollar continues to fall, opec members will see their real profits fall. Lack of meaningful action by opec may be the smallest of America’s dire oil-supply problems.