Oil and Exchange Rates

Someone I know was trying to convince me that exchange rates between the dollar and middle eastern currencies are the primary driver for oil price fluctuations, along with commodities speculation (never mind that the Saudi currency and others are tied to the dollar). So I did a little analysis. Here are the graphs:




DPB is dollars per barrel. The currency graphs are the price of a unit of currency in dollars. They are scaled to make them comparable. There is a mild correlation, but the oil price fluctuations are much larger than the currency fluctuations. This means the exchange rate cannot be driving the oil price, it has to be the other way around. When oil prices go up, the US economy will suffer, and the value of the dollar is weakened.

BTW, the price of oil is mostly driven by demand. All producers except for the Saudis are pretty much maxed out, a sign that we are close to the production peak.