Tag Archives: oil

Saudi Oil and the US dollar

Last week the dollar began to recover in value as the Bush administration finally started making serious noise about a strong dollar policy. Now, right on the heels of that display, the Saudis finally agree to up production.

Both events were a bit long in coming, at least relative to the reasons stated by each party. The Bush administration claimed it was (finally) worried that imports would become too expensive if the dollar were allowed to continue its slide. They didn’t seem concerned the past several years as the dollar slowly dropped a third in value. After all, it was their policies that caused it. Similarly, the Saudis have been fighting production increases all the way as oil has quadrupled in value. But now $140 is the magic number where they start to care?

It leads one to think maybe the two capitulations are connected. After all, high oil prices hurt America. A devalued dollar hurts the Saudis, as oil is priced in dollars. Priced in Euros, for example, the Saudis aren’t raking it in as much as it would seem. Given how much they trade with Europe, the dollar’s fall has offset a lot of the increase in the price of oil, especially given that they probably have a lot of production costs that are priced in other currencies, squeezing them from both directions. So, we prop up the dollar to help them, they increase production to help us. Given the connection between the Bushes and the Saudis, maybe the two governments finally addressing these longstanding problems at the same time is not a coincidence. Nor, perhaps, is it a coincidence that this coincidence happens during a presidential campaign.

Supply and demand in the Middle East

In the continuing interest of figuring out what in God’s name is going on with the price increases in oil, I did a little research on the US Government’s Energy Information Administration website, which apparently exists. (I suppose it may be an inexorable fact that governments continue expanding until beaurocracies are created to represent all possible three letter combinations, at which point they move on to four letter ones like USSR.)


To put the world oil supply in historical perspective, I took the past data for proven reserves and divided it by the yearly world oil consumption. The result (shown above in red) is a plot of the number of years worth of reserves in the ground expressed in the years of consumption at that time. If you can trust the reserve data, this number is basically a lower bound on the amount of time before the oil hits the fan. For reference, I’ve also shown the total worldwide consumption.

There are two interesting things, I think, about this plot. First, it’s kind of hard to worry too much about “peak oil” when the amount of time our reserves will last keeps going up, not down. Second, there doesn’t appear to have been any change in the consumption or suppy (at least in terms of reserves) that would justify the sustained rise in prices that occured around 2001.

Continue reading