High oil prices propping up the dollar?

[Sean]

Something I was thinking about recently. Is the government trying to intentionally raise oil prices to prop up the falling dollar. Since oil is bought with petrodollars the higher prices would require other countries to hold more dollars. If oil prices falls sharply then there will be less dollars needed decreasing the dollars value even more. Anyone know anything on how oil prices affect the dollar?

[Oliver]

I'm not sure if I can follow your synopsis. Firstly it's not Bush or politicians
who define the oil prices - it's the market itself. And what did you mean by
propping up the dollar? I don't see how this would achieve anything since
the US also had to buy the oil to the higher price.

Besides the fact that some people would seriously demand a good explanation
for the surprising increase in Oil-Prices.

But another interesting thing about this issue is the theory that Iran&Iraq
were/are in reality about both countries change to Petro-Dollars, which
supposedly threatened the Dollar. I don't know if there is anything to it, but
shortly after the Iraq invasion, the system was switched back to Petro-Dollars:

Wikipedia: Petrodollar warfare (http://en.wikipedia.org/wiki/Petrodollar_warfare)

[Gilby]

Since the mid-70s, the agreement with OPEC was that the US military would provide defense for member nations in exchange for exclusively accepting the dollar for oil, therefore, the value of the dollar is essentially backed by oil, or the military power of the US, since other nations demand our dollars.

Other countries accepting other currencies for their oil is therefore a threat to the value of the dollar, and may be the actual reason we are threatening Iran and went into Iraq.

So yes, increasing the buying power of oil may prop up the dollar assuming we can keep other oil producing countries to accept it.

[johngr]

I'm not sure if I can follow your synopsis. Firstly it's not Bush or politicians
who define the oil prices - it's the market itself.

Are you going to pretend that Bush's actions in the ME don't effect oil prices?! They control the amount that gets pumped out of Iraq. Congress can also pull little stunts suddenly reversing policy and calling the Armenian massacre a "genocide" (notice the Israelis were mum about that -- you'd have heard the whining all the way to Tripoli at any other time).

Threatening Iran? Nah, that has no effect at all on oil prices.

If oil stays in the ground, what does get pumped is priced higher. Duh! If there's instability and concern about supplies that affects the futures market. Duh!

[ARealConservative]

Not really.

Although theoretically, the higher the oil prices, the higher the demand for dollars.

But in the end just selling oil in dollars is all that is required to prop up the dollar.

[Thomas Paine]

Oil barrels are denominated in U.S. Dollars. Therefore, the weaker the U.S. Dollar, the more U.S. Dollars it takes to purchase a barrell of oil from OPEC. Recall that when the U.S. Dollar was strong a few years ago, the price of oil was very low.

In addition, because the U.S. Dollar is relatively weaker, other countries with stronger currencies (e.g. Euros) are increasing their demand for oil in order to take advantage of the fact that they can purchase more oil after converting their currency into U.S. Dollars. Higher demand leads to higher prices.

[ron_paul_silver_dollars]

Something I was thinking about recently. Is the government trying to intentionally raise oil prices to prop up the falling dollar. Since oil is bought with petrodollars the higher prices would require other countries to hold more dollars. If oil prices falls sharply then there will be less dollars needed decreasing the dollars value even more. Anyone know anything on how oil prices affect the dollar?


It's the other way around... a "lower" US Dollar props "up" the Oil prices.

As the US Dollar sinks in value... the more US Dollars OPEC Countries demand for a single barrel of their Oil (to offest the falling purchasing power of the US Dollar).

The US Dollar is sinking in value becuase Bernanke and the Federal Reserve are printing (creating) Dollars out of thin air at an increasingly rapid rate... and it boils down to the simple economic rule of "supply and demand"; the more you make of something, the less value that something has.

If the USA went back to the Gold standard (as Ron Paul advocates) the US Dollar would immediately start rising in value, and Oil prices (and other commodities pricd in US Dollars) would immediately start dropping... which would be beneficial for Americans.