How Does the Weak Dollar Affect Oil Prices?

Around the world, there is anguished hand-wringing about the high price of oil. But if political leaders and policymakers want lower oil prices, they should be promoting policies that strengthen the dollar.

The implications of pricing oil in any single-currency are more far-reaching than most people think. For example, some oil-producing countries ask their customers to pay in euros, but that does not mean that their oil is priced in euros. And even if dollar prices were to be replaced by euro prices, the impact of single-currency pricing on the oil market would be the same.   

While oil-exporting countries receive revenues in dollars (or their euro equivalent), they use different currencies to import goods and services from various countries. Any change in the exchange rate of the dollar affects the purchasing power of these countries, and therefore their real income. 

Likewise, international oil companies sell most of their oil in dollars, but they operate in various countries and pay some of their costs in local currencies. Any change in the value of the dollar therefore affects their cost structure and profitability. In turn, it affects reinvestment in exploration, development, and maintenance.