Pricey Oil and a Strong Dollar - A Dangerous Combination

Chart of the Week for October 6-12, 2000

Rising oil prices are pinching consumers in the U.S., but causing real pain abroad. That’s because oil prices are in US dollars worldwide, so other nations have to convert their own currency into dollars to purchase oil. As a result, oil prices, which have been soaring for the past two years, were even higher for many nations.

For instance, as the chart above depicts, oil prices rose 145% in the US, 182% in Australia and a staggering 232% in Europe since January 1999. (Now we understand the strikes-and-blockades reaction.) Because the euro slid (31)% against the dollar for that period, Europe was hit the hardest. Japan, whose currency enjoyed a 2.3% appreciation against the dollar for the same period, saw oil prices rise 139%.

If oil prices continue to rise at the same pace, this may have damaging repercussions on the global economy, as consumers will have to devote a greater fraction of their income to energy costs. Consequently, there will be less money to purchase domestic or foreign goods, with the ultimate result being a slowdown of the global economy.

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