Originally Posted by donsutherland1

Today, U.S. Treasury Secretary Henry Paulson argued that the weaker U.S. dollar should not be blamed for rapidly rising oil prices. Reuters reported:

"The dollar has had a very small impact," Paulson told reporters in London, after a meeting with top British bankers and British finance minister Alistair Darling.

"Take a look, the dollar has depreciated roughly 24, a little bit less than 25 percent, since February 2002. Oil has gone up well over 500 percent. It's gone up in every currency."

Not exactly. As the price of crude oil is denominated in dollars, changes in the dollar's value has an impact. In this case, dollar weakness amplified the increase in crude oil prices stemming from a combination of fundamental and geopolitical factors.

Using Mr. Paulson's timeframe, the price of crude oil rose from $20.40 per barrel on February 1, 2002 to $143.57 per barrel yesterday. If one factors in the change in the U.S. dollar over that time as per the Federal Reserve's Broad Dollar Index, had the U.S. dollar not decline, the equivalent price of oil would have been $105.61. Hence, Americans would be paying $37.96 per barrel less had the dollar not depreciated. Had the dollar actually increased 10% in value over that time, the price of oil would have amounted to $96.01 per barrel. Under that scenario Americans would have been paying $47.56 less per barrel.

Of course, the lower dollar-equivalent price would likely have led to greater U.S. consumption, so the actual savings would probably have amounted to somewhat less. Nevertheless, the drop in the dollar has amplified the trend toward higher crude oil prices and the impact has not been "very small."