Oil and the Dollar

From today's WSJ: Strong Dollar Pushes Oil Lower.

As per convention, oil is a commodity priced in dollars.

Let's suppose for a moment that the fundamental market forces, which determine oil's price (ie, supply and demand) are held constant. If the USD, oil's currency denominator, appreciates (depreciates) then by definition the dollar price of oil will decrease (increase). In effect, the relationship between oil and the dollar (again, ignoring oil's fundamentals) is an accounting identity.

This begs the question, why would the WSJ Commodities desk lead with such an asinine headline? Granted, the article does mention something about XOM reaching an agreement with striking Nigerian workers, which could be a production boon. But this subsidiary story clearly plays second fiddle to the strengthening dollar's overture.

To make an informed judgment about the price of oil, we need to quiet the "noise" introduced by the dollar donimation convention. How? One simple solution would be to offer oil's price in Euro terms alongside its price in dollars and the EUR/USD exchange rate. Suppose: (a) the dollar appreciates against the Euro; (b) the dollar also appreciates against oil; and (c) the Euro price of oil is unchanged. In this scenario, what have we learned about oil in observing its dollar price decline? The answer: nothing we couldn't have gleaned from the WSJ's Currencies column.

I'm not the first person to criticize the media's coverage of oil price movements. If you're interested, Felix Salmon has been tracking other instances of "the oil price denomination fallacy."