I’ve been kicking around this question with some of my associates here at UtiliPoint over the last few weeks. In trying to quantify the impacts of a weak dollar, the most obvious way, at least to me was to look at the buying power of the Euro as opposed to the USDollar. The reason being that the Euro/Dollar relationship is probably the most watched and the most used in terms of determining the relative strength of either currency.

Given that, I did a quick analysis of the crude buying power of the Euro. As most everyone realizes, the global crude markets operate in dollars, meaning that when buying or selling, crude is always priced in US$. Given that, and the fact that the US$ is at record lows versus the Euro, what is the real cost of crude in Europe? I did this by simply taking the US Spot crude price and adjusting for the Euro/US$ exchange rate over the last 6 years. Here’s what I got…

Clearly, the combination of a weak dollar and a dollar standard for crude pricing does have a cost to the consumers in the US and offers advantages to the consumers in the Euro denominated countries. As of early January 08, the cost/value is around $30/bbl. Of course that assumes that if the dollar was trading at parity to the Euro, the price of crude would come down in a commensurate manner - a bit of a stretch given the complex dynamics at play in the global market. Still, I think it’s fair to say the US market is paying a significant premium, as much as 33%, due to the weak dollar. An obvious crude hedging device would be to leverage the Euro/US$ exchange rate.

I also wanted to look at the relationship between the cost of unleaded gasoline in Europe and that of the US. I’ve seen a number of news stories recently that practically shout about the high prices of gasoline in Europe, with many of them citing numbers like $7 or $8. The obvious problem here is that Europeans don’t pay for their gas in US dollars. European pump prices expressed in dollars matter only to those people whose salaries are paid in US$ and for some reason find themselves filling up in Paris or Berlin. The real questions here are: what’s the price in your currency and how much of that price actually reflects the cost of the product, versus how much reflects the cost of the add-ins, namely taxes? I pulled the average pump prices and tax rates in Europe from the European Commission website, ec.europa.eu. I compared these to the US pump prices available from the EIA. This is what I found…

The top, red line represents the average pump price in the EU25 countries, expressed in terms of Euros/gallon. This is based on pump prices ranging from .92 Euros to 1.146 Euros per liter (bottom dark blue line).

The light blue line is the US average pump price in $/gallon. In terms of trajectory, the US price is clearly moving upward more quickly the European price.

If you strip out taxes from the pump prices, you start to really see the effects of the weak dollar. Europeans, as most everyone knows, pay significantly higher taxes on all fuels. For gasoline, the European Commission website shows an average rate of about .65 Euro/liter, although it varies across the continent. This equates to 2.46 Euros/gallon, compared to the US average rate of about $.49/gallon. If you strip out the taxes from the respective pump prices, you get the purple line (US commodity price $/gal) and the green line (EUR commodity price Euros/gal). While part of the difference in prices can be attributed to geographic and logistical costs, clearly, Europeans are seeing benefit at the pump. With the weakening dollar, Europeans have seen themselves going from paying a premium to getting a discount when it’s time to fill up.

RSS feed for comments on this post.
TrackBack URI