The Impact of Dollar Devaluation on World Oil Industry: Do Exchange Rates Matter?

Transcription

1 The Impact of Dollar Devaluation on World Oil Industry: Do Exchange Rates Matter? A. F. Alhajji, Ph.D. Associate Professor College of Business Administration Ohio Northern university Ada, Oh, 4581 A. F. Alhajji. July 24 1

2 Outline Introduction The Impact of Exchange Rates on Supply Exchange Rates and Drilling Activities Exchange Rates and Production Exchange Rates and Exports Exchange Rates and Purchasing Power Exchange Rates and Inflation The Impact of Exchange Rates on Demand The direct impact The indirect impact Empirical Evidence Conclusions A. F. Alhajji. July 24 2

3 Facts Crude Oil is priced in US dollars while products are priced in local currencies. Oil revenues for countries and most oil companies are in US dollars. International oil companies operate around the world and use different currencies. Producing countries trade is denominated in US dollars and other world currencies. Producing countries have different trade partners. A. F. Alhajji. July 24 3

4 Observations Oil Prices are high only in dollars but they are relatively low in other currencies, especially the Euro and the yen. See the four figures below A. F. Alhajji. July 24 4

5 Oil Prices in Dollar and Euro $& /b WTI ($) Brent ( ) /4/1999 4/4/1999 7/4/1999 1/4/1999 1/4/2 4/4/2 7/4/2 1/4/2 1/4/21 4/4/21 7/4/21 1/4/21 1/4/22 4/4/22 7/4/22 1/4/22 1/4/23 4/4/23 7/4/23 1/4/23 1/4/24 4/4/24 A. F. Alhajji. July 24 5

6 Oil Prices Dollar and Yen $ Oil Price Oil Price $/b /b A. F. Alhajji. July 24 6

7 Oil Prices in Dollar and DM $ Oil Price DM Oil Price Oct-73 Oct-74 Oct-75 Oct-76 Oct-77 Oct-78 Oct-79 Oct-8 Oct-81 Oct-82 Oct-83 Oct-84 Oct-85 Oct-86 Oct-87 Oct-88 Oct-89 Oct-9 Oct-91 Oct-92 Oct-93 Oct-94 Oct-95 Oct-96 Oct-97 Oct-98 Oct-99 Oct- Oct-1 Oct-2 Oct-3 A. F. Alhajji. July 24 7

8 Oil Prices in Dollar and Sterling $/ /b $ Oil Price Oil Price Oct-73 Oct-74 Oct-75 Oct-76 Oct-77 Oct-78 Oct-79 Oct-8 Oct-81 Oct-82 Oct-83 Oct-84 Oct-85 Oct-86 Oct-87 Oct-88 Oct-89 Oct-9 Oct-91 Oct-92 Oct-93 Oct-94 Oct-95 Oct-96 Oct-97 Oct-98 Oct-99 Oct- Oct-1 Oct-2 Oct-3 A. F. Alhajji. July 24 8

9 Results Dollar devaluation reduces oil supply and increases oil demand. Dollar devaluation reduces drilling activties in some areas such as the North Sea. Dollar devaluation reduces drilling activities in the oil producing countries. It reduces their purchasing power and causes inflation. Dollar devaluation increases oil demand in Europe and Japan Dollar devaluation increases oil demand in the US as US tourists spend their vacations in the US instead of Europe. A. F. Alhajji. July 24 9

10 Observations on Drilling Activities Drilling activities are highly correlated with oil prices There is a lag when prices increase. No lag when prices decrease. Changes in the world rig count are misleading. They follow changes in US. This pattern does not hold in recent months. Is it because of dollar devaluation? A. F. Alhajji. July 24 1

11 Observations on Drilling Activities Drilling activities in the Middle East and Latin America are highly correlated with oil prices in US dollars Drilling activities in Europe are positively correlated with oil prices in Euro and negatively correlated with oil prices in US dollars. As prices in Euro decrease (lower dollar), rig count decreases. As the dollar goes down, rig count goes down See the following six figures. A. F. Alhajji. July 24 11

12 Oil Prices and Rig Count U.S. World Oil Price Rigs $/B Price January 1976 January 1977 January 1978 January 1979 January 198 January 1981 January 1982 January 1983 January 1984 January 1985 January 1986 January 1987 January 1988 January 1989 January 199 January 1991 January 1992 January 1993 January 1994 January 1995 January 1996 January 1997 January 1998 January 1999 January 2 January 21 January 22 January 23 January 24 January A. F. Alhajji. July 24 12

13 Oil Prices ($) and Rig Count (Latin America) $/b 4 Latin America Oil Price Rigs January 1976 January 1977 January 1978 January 1979 January 198 January 1981 January 1982 January 1983 January 1984 January 1985 January 1986 January 1987 January 1988 January 1989 January 199 January 1991 January 1992 January 1993 January 1994 January 1995 January 1996 January 1997 January 1998 January 1999 January 2 January 21 January 22 January 23 January 24 January A. F. Alhajji. July 24 13

14 Oil Prices and Rig Count (Middle East) M East Oil Price Rigs $ January 1976 January 1977 January 1978 January 1979 January 198 January 1981 January 1982 January 1983 January 1984 January 1985 January 1986 January 1987 January 1988 January 1989 January 199 January 1991 January 1992 January 1993 January 1994 January 1995 January 1996 January 1997 January 1998 January 1999 January 2 January 21 January 22 January 23 January 24 January A. F. Alhajji. July 24 14

15 Rig Count: World-US, US, Vs. Oil Prices 5 World-US U.S. Oil Price Rigs $/b Price January 1976 January 1977 January 1978 January 1979 January 198 January 1981 January 1982 January 1983 January 1984 January 1985 January 1986 January 1987 January 1988 January 1989 January 199 January 1991 January 1992 January 1993 January 1994 January 1995 January 1996 January 1997 January 1998 January 1999 January 2 January 21 January 22 January 23 January 24 January A. F. Alhajji. July 24 15

16 Oil Prices ($) Vs Rig Count in Europe Rigs Europe Rig Count Oil Price 3 4 $/B January 1976 January 1977 January 1978 January 1979 January 198 January 1981 January 1982 January 1983 January 1984 January 1985 January 1986 January 1987 January 1988 January 1989 January 199 January 1991 January 1992 January 1993 January 1994 January 1995 January 1996 January 1997 January 1998 January 1999 January 2 January 21 January 22 January 23 January 24 January A. F. Alhajji. July 24 16

17 Oil Prices ( ) Vs. # of Rigs in Europe Rigs Europe Rig Count Oil Price ( ) 3 3 /b January 1976 January 1977 January 1978 January 1979 January 198 January 1981 January 1982 January 1983 January 1984 January 1985 January 1986 January 1987 January 1988 January 1989 January 199 January 1991 January 1992 January 1993 January 1994 January 1995 January 1996 January 1997 January 1998 January 1999 January 2 January 21 January 22 January 23 January 24 January A. F. Alhajji. July 24 17

18 Oil Consumption in the UK Depreciation of the dollar increased consumption in recent months. Consumption declined sharply in the fourth quarter of 2 when the dollar appreciated relative to the Sterling and the Euro. Dollar devaluation has little impact on other European countries because of high taxes on petroleum products. See the following Figure. A. F. Alhajji. July 24 18

19 Oil Prices and Petroleum Consumption in the UK Price 4. WTI ($) Brent ( ) UK January 2 January 21 January 22 January 23 January 24 January 14. A. F. Alhajji. July 24 19

20 The Impact on Oil Producing Countries Dollar Devaluation: Causes inflation Reduces purchasing power Increases cost of operations if spare parts are imported from Europe and Japan This would reduce upstream investment. It will apply to US oil companies operating in OPEC. See next 14 figures on the relationship between dollar devaluation and inflation in the oil producing countries A. F. Alhajji. July 24 2

21 Inflation and Oil Prices (Saudi Arabia) $ Index Dollar Index Inflation in SA % 12 Gulf War A. F. Alhajji. July 24 21

22 Inflation and Oil Prices (Oman) $ Index Dollar Index Inflation In Oman % 12 Gulf War A. F. Alhajji. July 24 22

23 As the dollar increases, inflation decreases: Saudi Arabia % Inflation and Dollar SA $ A. F. Alhajji. July 24 23

24 Oman % Inflation and Dollar Oman A. F. Alhajji. July 24 24

25 Qatar % Inflation and Dollar Qatar A. F. Alhajji. July 24 25

26 UAE % Inflation Dollar UAE A. F. Alhajji. July 24 26

27 Bahrain Inflation Dollar Bahrain A. F. Alhajji. July 24 27

28 Algeria Inflation Alg A. F. Alhajji. July 24 28

29 Iran Inflation and Dollar Iran A. F. Alhajji. July 24 29

30 Nigeria Inflation Nigeria A. F. Alhajji. July 24 3

31 Russia Inflation Russia A. F. Alhajji. July 24 31

32 Colombia Inflation Colombia A. F. Alhajji. July 24 32

33 Angola Inflation Angola A. F. Alhajji. July 24 33

34 Observations 1. The exchange rate-inflation effect declines as the percentage of oil exports in total exports declines. 2. The relationship between dollar devaluation and inflation in the oil producing countries does not hold if: The local currency is not pegged to the dollar The economy is diversified The dependence on oil is small Norway, Indonesia, Gabon, and Mexico Out of 18 oil producing countries, only four countries found not have an inverse relationship between the value of the dollar and inflation. A. F. Alhajji. July 24 34

35 Loss of Purchasing Power The Following Figure shows OPEC basket prices (red), prices adjusted for exchange rates (Green), and Prices adjusted for exchange rates and import prices (blue). Losses due to import prices are much larger than losses (some times gains) due to exchange rates. OPEc should address import prices rather than currency exchange rates! A. F. Alhajji. July 24 35

36 Loss of Purchasing Power $/b OPEC Basket Price Adjusted for Exchange Rates Adjusted for Infaltion Jul-9 Jan-91 Jul-91 Jan-92 Jul-92 Jan-93 Jul-93 Jan-94 Jul-94 Jan-95 Jul-95 Jan-96 Jul-96 Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan- Jul- Jan-1 Jul-1 Jan-2 Jul-2 Jan-3 Jul-3 A. F. Alhajji. July 24 36

37 Loss of Purchasing Power The following two Figures show oil prices after adjusting them for purchasing power (adjusted for import prices and exchange rates) for three OPEC members. The US real price of oil (adjusted for US inflation) is added for comparison. OPEC members have different trading partners. Therefore, the effect of dollar devaluation differ from one country to another. A. F. Alhajji. July 24 37

38 Purchasing Power Oil Prices 18 Indonesia Venezuela UAE US A. F. Alhajji. July 24 38

39 Real Oil Prices (constatnt 197) Saudi Arabia UAE Kuwait Libya Indonesia Venezuela USA A. F. Alhajji. July 24 39

40 Results Dollar depreciation reduces activities in upstream through different channels including lower return on investment, increasing cost, inflation, and purchasing power Dollar devaluation increases demand in countries with appreciated currencies because of increase in purchasing power. Dollar devaluation increases demand in the US as tourists prefer to spend their vacations in the US. A. F. Alhajji. July 24 4

41 Results Studies that focus on demand elasticities must use oil prices denominated in national currencies, not in US dollars. Studies that focus on the relationship between energy prices and economic growth must use oil prices denominated in national currencies, not in US dollars. Exchange rates may explain several issues in international energy markets that researchers are not able to sort out or agree on. A. F. Alhajji. July 24 41