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The dollar's dependence on oil - why is this happening

The dollar's dependence on oil - why is this happening

Many people wonder why there is such a pattern or dependence - the price of oil is falling, the dollar is rising and vice versa.

Before we proceed to the disclosure of the main essence of the oil-dollar connection at the national level, information for reflection on a banal example.

Let's take a conditional situation.

You produce gingerbread cookies that you sell abroad for US dollars (1000 gingerbread cookies for 1 USD). Everything is fine at the rate of 70 RUB for 1 USD, the incoming revenue is enough for you (1000 gingerbread x 1 USD x 70 RUB = 70,000 RUB) to cover your monthly expenses that you bear in RUB and are also equal to 70,000 RUB (the cost of flour, electricity, wages). Well, as you know, in your own country, all expenses are naturally carried out primarily and in their own national currency. That is, we have a parity of 70,000 RUB received and 70,000 RUB spent – we are working at a break-even level.

The situation is changing abroad (something has happened) and the price of gingerbread is no longer 1 USD, but 0.9 USD. That is, less revenue will already arrive (1000 gingerbread x 0.9 USD x 70 RUB = 63,000 RUB), and the costs in RUB will remain the same (70000 RUB)). Already a loss (- 7000 RUB).

In order to maintain the previous break-even level, it is necessary in the current situation (in the foreign market) to devalue the RUB rate to the level of 77.8 per 1 USD. Then the volume of incoming revenue (1000 gingerbread x 0.9 USD x 77.8 RUB = 70000 RUB) it will be comparable to the volume of expenses again.

Therefore, the exchange rate increases when the price in the currency for which the revenue is received falls.

Regulator (Central Bank) this is what he does (he changes the course mainly due to internal interventions - he buys bucks on the stock exchange, thereby devaluing RUB relative to USD), when, of course, we are talking about key sectors of the economy whose activities directly affect the replenishment of the state budget, and not about gingerbread :).

And when the price in USD in the foreign market increases, what happens.. ? - the USD to RUB exchange rate will fall in most cases.

If suddenly, for some reason, you find a new buyer of your gingerbread, who, for example, will already be ready to pay their cost for Chinese yuan or Mongolian tugriks, then your budget will already depend on the exchange rate of this currency against the ruble, and not the dollar.

Well, if an attempt to untie the gingerbread that you sell on the foreign market from the dollar does not bring the desired result, then this indicates the preservation of the gingerbread-dollar connection against the background of global demand in trade (not only with you) from your partners of the latter.

In addition to exports (sales on the foreign market), the situation can also be "heated up" by imports (purchases on the foreign market), which for the most part also requires the dollar equivalent of the calculation, as well as debts, surpluses or overruns of reserves in this currency, etc.

Therefore, this pattern is not direct, but multifactorial, which does not always cause 100% correlation: the product is the exchange rate of a dependent currency.

We go further on the topic of the "long–suffering" classics – oil – dollar - ruble.

What is primary – oil from the dollar or the dollar from oil?

Everything is quite simple.

This is a classic scheme, which is inherent mainly in those countries where there is a significant dependence of their total budget income and balance of payments on the cost of oil and gas products on world markets.

Such countries include Russia, the main foreign trade partner of Belarus, the share of oil and gas revenues in the consolidated budget of which is about 45%.

share of oil revenues in the budget of countries

What does this mean !

All calculations on oil and gas contracts in the world are carried out in US dollars, which determines the dollar equivalent of the oil price.

When the oil price is primary in the change in the US dollar exchange rate.

If there are any events contributing to the change in oil prices, for example, due to restrictions on production volumes from OPEC, a decrease in demand from major global consumers (the use of previously accumulated reserves, a slowdown in the economy), etc., then naturally the demand for oil falls with the supply remaining. These factors, in accordance with the law of the market, contribute to the logical reduction of its price.

That is, buyers can already offer less dollars for 1 barrel of oil, which means that countries whose budget income is largely generated by oil and gas revenues will not receive a significant part of US dollars to maintain their foreign trade balance of payments.

It turns out that there will be less currency (dollars) in the country, and the costs in them will remain the same. Therefore, in order to smooth out this imbalance, the value of the dollar at the national level increases relative to the national currency. The question is already only how much. Everything depends, again, on the share of this source of income in the country's budget and its foreign exchange reserve funds.

Similarly, with an increase in oil demand with a continuing supply (production): the price of oil is rising, and the exchange rate of the national currency is strengthening, that is, the US dollar is falling.

The key regulators of oil prices are the countries with the largest volume of consumption of oil and gas products on a global scale (USA, China, India), which provide the main demand for this product. It is they who set the tone for all these course intrigues.

the world's main oil consumers in 2020

When the dollar exchange rate is primary in the change in the price of oil.

If other factors are triggered (dollar inflation, weakening of the Fed's monetary policy, low interest rates, etc.) that change the dollar exchange rate at the national level (USA), then this also affects the change in the world oil price.

But here the connection is already relative to the increased cost of oil produced due to this, the costs of which are formed in the national currency of those countries that produce it. And naturally, in order not to lose revenue, producers (miners), in order to maintain their profitability, raise the price of oil. In this scenario, this approach is typical not only for oil, but also for all other goods produced outside the United States.

All this dependence of the dollar on oil and vice versa has a great impact on the economy of the oil and gas industry, due to the fact that the cost of hydrocarbons is formed in rubles, and the world price for them is formed in US dollars.

With a strong ruble and a weak dollar, the economy of the oil industry suffers (the cost is high in dollars), respectively, and the budget, too, and, conversely, with a weak ruble (the cost is low in dollars) and a strong dollar, both the oil industry and the budget benefit.

As for Belarus.

The share of oil revenues in the budget of Belarus is determined, to a greater extent, by the amount of export duties from the sold oil and products from it to foreign markets. Before the tax maneuver, on the part of Russia, this amount was about 9% of the total revenue. Currently, this value fluctuates at the level of 5.6%.

This indicates that the dependence of the revenue part of the consolidated budget of Belarus on oil is small. However, due to the large volume of products sold to Russia, the exchange rate of the Belarusian ruble is more tied to the Russian monetary unit (in order to maintain price parity with the Russian market). And this means that any fluctuations in the price of oil on world markets, affecting the exchange rate of the Russian ruble against the dollar, are symmetrically reflected on the "hare".

share of oil revenues in the budget of Belarus
'oil in total exports of Belarus' title=

But not always, this classic pattern works – one grows and the other falls. A situation is also possible when, for example, oil is growing, but the dollar is not falling.

This scenario is possible if :

  • there is a reason at the national level not to weaken monetary policy and not to lower the interest rate, which is directly related to the US dollar exchange rate and inflation of the country where the decision is made
  • the government has decided to increase the country's gold and foreign exchange reserves at the expense of oil revenues on the eve of difficult times (sanctions, epidemic, etc.) or depleted reserve funds

The dollar's dependence on oil - why is this happening Somehow!

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