James Hamilton at Econbrowser has an interesting look at the recent shifts in the price of crude oil and concludes that the move is too big to be a product of U.S. dollar moves alone.
As he pointed out, a rise or fall in the value of the U.S. dollar helps explain a large portion of the moves in commodity prices. As the dollar falls, commodity prices rise, and vice versa. For example, between September 2009 and September 2010, a 1 per cent depreciation in the value of the U.S. was associated with a 1.3 per cent gain in commodity prices for things like copper and oil - and that 0.3 percentage point extra gain was due to a rise in incomes outside the United States.
So what happened last week, during the sharp drop in commodities? In the case of copper , the relationship with the U.S. dollar held true: The U.S. dollar rose 3.5 per cent against the euro between Wednesday and Friday, and copper fell 4.5 per cent.
But oil was another story, and not just last week. Between February and March, oil rose 19 per cent, while the dollar fell just 3 per cent. Similarly, crude oil fell nearly 15 per cent last week, far outpacing the gains in the dollar.
Mr. Hamilton believes that the earlier run-up in the price of oil was largely due to production halts in Libya. Though the country produces just 2 per cent of world's crude oil, that's enough to cause a 20 per cent price spike given the tight supply situation.
However, if political uncertainty in North Africa fails to spread in any significant way to other major oil-producing nations in the Middle East, then the likely direction for oil is down. Indeed, he believes that last week's sharp declines could be just the beginning. Why? Mr. Hamilton believes that global oil production - contrary to fears that it has already peaked - is actually on the upswing, and it is rising faster than global consumption.
"It's interesting to note that, from production data, it looks as if we're finally lifting above the five-year plateau, with the latest production figures showing significant increases relative to 2005 in countries such as the U.S., Brazil, Russia, Angola, Iraq, Azerbaijan, China, and Canada far in excess of the declines in the North Sea, Mexico, Venezuela, Indonesia, and Saudi Arabia over that period," he said.
David Berman