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1 1 (April 12, 2016)

handle is hein.crs/govcdwz0001 and id is 1 raw text is: Oil Prices and the Value of the Dollar April 12, 2016 0 ii ', ..... Oil prices, as measured by the spot price of West Texas Intermediate (WTI), achieved a level of $107.95 per barrel on June 20, 2014. By March 14, 2016, the price of the same barrel of oil had sunk to $37.20 per barrel, a decline of over 65%. The fall in the price of oil was not continuous. After the initial decline, oil prices seemed to have stabilized in the $60 per barrel range from April 2015 through June 2015, but then began to decline again. Figure I. Spot Price of West Texas Intermediate Oil, 2013-2016 Dollars/barrel $120 $ 40 2013 2014 2015 2016 Source: Energy Information Administration, oil price data. Graphic by CRS. Many explanations have been given for the decline in oil prices. On the market fundamentals side, weak economic growth, almost worldwide, was credited with reducing overall oil demand growth. On the supply side of the market, rapid growth of U.S., and other, non-conventional oil supplies, as well as increasing production in Iraq, were creating a supply glut, resulting in record amounts of oil held in storage. With respect to political/economic factors, the Organization of the Petroleum Exporting Countries (OPEC) declined to make production cuts that would limit supply and potentially support prices. In addition, economic sanctions against Iran appeared likely to be lifted, potentially introducing even more oil supply into an already over-supplied world market. An additional factor affecting oil prices that received analyst attention during the oil price decline was exchange rates, or, in particular, the value of the U.S. dollar. The link between the value of the dollar and the spot price of WTI is, for many, one of the more opaque factors in oil pricing. On the world oil market, oil is priced in U.S. dollars, and all oil market transactions result in transfers of dollar balances. As a result, the United States is, in effect, an indirect participant in all world oil trades through the use of its currency. This indirect participation occurs through the mechanism of the exchange rate, the value of the U.S. dollar compared to the values of other currencies worldwide. The U.S. dollar serves as a reserve currency for the world economy. This means that most nations hold dollars to facilitate international trade, as well as a way to hold wealth. However, the dollar's value, computed as the number of dollars it takes to purchase one unit of a foreign currency, or a specified basket of currencies, varies almost continuously, reflecting world economic conditions. Currency values are reciprocal, in the sense that when the U.S. dollar rises compared to, say, the Japanese yen, this is equivalent to saying that the Japanese yen has fallen in value compared to the U.S. dollar. Figure 2. Value of the Dollar, 2013-2016 Trade weighted exchange index 120 40 2013 2014 2Q15 2016 Source: Federal Reserve Bank of St. Louis, exchange rate data. Graphic by CRS. The value of the dollar as measured against a trade- weighted index of major currencies began increasing in July of 2014 when the index measured 76.3729. By March of 2016 the index stood at 92.9248, representing an increase of over 21 %. With respect to the time trend, it appears that the value of the dollar began increasing soon after oil prices began to fall in June of 2014, and continued to rise over the period of declining oil prices, but by a percentage magnitude of only approximately one third of that of the change in oil prices. This pattern of oil price and exchange rate data suggests that exchange rates, while not precipitating the fall in oil prices, could be a factor in their continuing decline. The value of a nation's currency depends on a variety of economic factors related to the world demand for the currency and the supply of the currency on the world currency market. Economic factors important in exchange rate determination include inflation rate differentials between countries, .O 'T p\w gnom ggmm mppm qq\ a , q 'S I 11LIANJILiN,

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