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Strong U.S. Dollar Pushes Oil Prices Lower

RACHEL MARTIN, HOST:

As we just heard, one of the reasons oil prices are so low right now is oversupply, but there's something else at play here - a strong U.S. dollar. It turns out that when the dollar is doing well, it pushes down the price of oil, at least in this country. From our Planet Money team, Stacy Vanek Smith has the story.

STACY VANEK SMITH, BYLINE: The U.S. economy has been doing pretty well recently, at least compared to everyone else, and that relative success has helped push the value of the dollar way up. Stephen Schork is an oil trader and analyst.

STEPHEN SCHORK: What we've seen over the summer is approximately a 10 percent increase in the value of the dollar, and this is likely associated with concerns of both the Asian and European economies.

SMITH: When our currency is strong, oil gets cheaper; you can buy more oil for a dollar. And that's good for the U.S. economy, says Schork, because money that would have gone into our gas tanks can be...

SCHORK: Spent elsewhere in the economy, like buying $4 lattes at Starbucks.

SMITH: Which is good for U.S. businesses, but not so good for Europe and Asia whose currencies have weakened against the dollar. Here's the weird part; oil is sold in dollars always for everyone. France, China, Italy, Japan - everyone buys oil in dollars, and that has been true for a long time.

PHIL FLYNN: After World War II, the dollar became the international currency of trade.

SMITH: Phil Flynn is a senior market analyst at the PRICE Futures Group in Chicago. He says the fact that everyone has to buy oil in dollars means that when the dollar gets stronger, oil gets more expensive for other countries.

FLYNN: Think of it when you're on a vacation, if you're going to Europe and the dollar's very strong, you're going to be able to buy more stuff with that dollar because of the exchange rate. If the dollar is weak, you know, you're going to go over to Europe and a Big Mac may cost you $20.

SMITH: Because Europe's economy is struggling, the euro has gotten weaker, and now countries like France and Italy are buying a $20 Big Mac whenever they fill up their gas tanks. So even though oil prices are falling right now, they're falling less for the countries that probably need cheap oil the most, says Flynn.

FLYNN: While the barrel of oil is cheaper here in the U.S. - for the U.S. consumer - it's going to be more expensive for people overseas. And that's really adding to some of the economic woes that they're having right now.

SMITH: Though slowing economies will buy less oil, demand for oil will fall, and that could push the price of oil down even more. Stacy Vanek Smith, NPR News. Transcript provided by NPR, Copyright NPR.