The U.S. Trade Deficit, the Dollar, and the Price of Oil

James K. Jackson
Specialist in International Trade and Finance

Rapid changes in the price of oil and the impact of such price changes on economies around the globe has attracted considerable attention. In mid-2008 as the price of oil rose to unprecedented heights and then dropped sharply, the international exchange value of the dollar fell and then rose relative to a broad basket of currencies. For some, these two events seem to indicate a cause and effect relationship between changes in the price of oil and changes in the value of the dollar. Despite common perceptions that there is a direct cause and effect relationship between changes in the international exchange value of the dollar and the price of oil, an analysis of recent data indicates that changes in the price of oil are driven by changes in the demand for oil that is different from the supply of oil, rather than changes in the value of the dollar. 

This report analyzes the relationship between the dollar and the price of oil and how the two might interact. While the data do not support a strong cause and effect relationship between the value of the dollar and the price of oil, there likely are various channels through which changes in the price of oil and in the value of the dollar may be indirectly correlated. The data also indicate that an increase in the demand for crude oil that exceeded the increase in the supply of oil and a laggardly pace in oil production capacity likely are among the main factors behind the sharp run up in the price of oil that occurred over the first seven months of 2008. The rise in oil prices also affected the U.S. trade deficit. That impact lessened as the price of oil plummeted and as a drop in economic activity reduced demand for oil imports. This report provides an assessment of the impact a range of prices of imported oil could have on the U.S. trade deficit. .


Date of Report: February 12, 2010
Number of Pages: 23
Order Number: RL34686
Price: $29.95

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