Euro’s Impact on Climate Change, My Vacation and Oil Prices
As a notice to my faithful readers, I leave for Spain tonight for a quick vacation. As I get ready to leave, I looked at the exchange rate for dollars to euros. Although Google tells me the rate is $1.41, my bank says the rate is $1.51…but I digress.
The dollar and the price of oil have inverse relationship. What in English means that when the dollar gets weaker, the price of oil goes up. You literally get less chitty chitty bang bang for your buck.
A weak dollar won’t buy as much in countries with strong currencies as it did at some point in the recent past. Inversely a strong dollar helps keep oil prices lower. When the dollar weakens investors try to find a quick way to get their asse(t)s out of dollars. This causes them to switch their cash dollars to commodities like oil. Investors’ need to use commodities as an inflation hedge.
A weak dollar isn’t good for my travel plans. But it is good for climate change action. We all know that investment in alternative energy and conservation has more momentum when oil prices are high. Prius sales were highest last summer when oil prices were the highest.
While I am sure this isn’t technically the way I should think about it, the Euro’s relationship to oil is like back in high school math class when you had a double negative number – it becomes a positive. So if the dollars and oil have a inverse relationship there is a positive correlation between Euro’s and oil prices. Actually authors Christian E. Weller and Scott Lilly from this Center for American Progress article figured that 70% of the time the movements between the Euro and oil where about the same.
We can measure how much these two prices move in tandem, using a correlation coefficient. This measure takes on the value of zero if there is no correlation, the value of one if there is perfect correlation, i.e. every time one price goes up the other one does, too, and the value of minus one if there is perfect negative correlation, i.e. every time one price goes up, the other goes down. The correlation coefficient between oil and dollar is -0.7. That is, most of the time, when the dollar fell against the euro, oil prices rose.
This can be seen on the graph below:
Seeking Alpha - Oil and Euro Index
As we bounce back from this economic slow down, oil prices should continue to rise and investment in alternative energies will also rise. As the financial blog Seeking Alpha puts it:
Everyone knows that once we come out of the recession (and we will)…and the global economy starts hitting on all cylinders once again, that oil and gas prices will head much, much higher.
You know if oil has almost doubled while we’re still in a global recession, that it will really increase once the major countries of the world are “out of the woods” and back into “growth mode” once again.
Too bad none of this happened in time for me to get a better exchange rate on my vacation.
