Lesson 1: The Changing Relationship of Oil and the US Dollar

The price of oil and the strength of the US dollar have always had an inverse relationship. This means that when the US dollar’s exchange rate falls, the value of oil rises. 

However, the dynamics between the two assets have changed in recent years. Since 2019, analysts have noticed a shift in the relationship between oil and the USD. 

This lesson will explore this change and its implications in the global economy. 

Lesson Highlights 

• The US dollar and oil used to have an inverse relationship. 
• Breakthroughs in horizontal drilling and fracking technologies in the US enabled the country to become largely self-sufficient in terms of petroleum production. 
• The US has been a historically oil-importing country. 
• The development of the US shale industry reduced the US reliance on imported oil. 
• Oil barrels are priced in USD in the global market. 
• Before becoming an oil producer, the US trade deficit positively correlated with oil prices. 
• Becoming a major oil producer allowed the US trade deficit to decrease as oil prices increase. 

A Brief History of the US Dollar and Oil 

To better understand the changing relationship between the US dollar and oil, you must first learn how the pair interacted in the past. 

Historically, the value of the US dollar has always moved in the opposite direction of oil’s market price. This relationship was primarily dependent on two factors: 

1. Oil barrels are priced in USD across the world. This means that you’ll need fewer dollars to buy a barrel of oil when the USD is strong. Conversely, a weaker dollar results in a higher price of oil in terms of dollars. 
2. The US has been a net importer of oil up until the shale industry revolution in the country. The US reliance on oil importation caused the country’s trade deficit to go up in tandem with oil prices as more dollars were spent to buy oil barrels abroad. 

Basically, when the US dollar gains strength, the oil dips in value. When oil becomes more valuable, the USD falters. 

But that was before. 

Why Is the Relationship Between the US Dollar and Oil Changing? 

The inverse relationship between the US dollar and oil started to shift when the US shale industry boomed. This development enabled the US to decrease its reliance on imported oil and produce its own. 

Advances in horizontal drilling and fracking technologies allowed the US not only to decrease its reliance on imported oil but also to become the largest producer of crude oil globally. 

Data released in 2022 on the world’s top oil-producing countries showed the US ahead of previous oil titans, Saudi Arabia and Russia. 

The US’ shift from being an importer to an exporter of oil resulted in a drastic reduction of its oil imports. This means the country is no longer negatively affected by rising oil prices. On the contrary, any increase in oil prices helps decrease the US trade deficit. 

This development led to the shift in the inverse relationship between oil and the US dollar. While the oil-USD dynamics have become increasingly unstable, the pair has yet to display a consistent positive correlation.