Publications: Notes at the Margin

US Economic Policy: A Major Threat to Oil-Exporting Nations

 

Oil is traded in United States dollars. The United States is the world’s largest oil producer and a major exporter of fossil fuels. The United States is also moving aggressively to terminate the independence of the Federal Reserve Board in pursuit of lower interest rates. The consequence will be a weaker dollar and probably higher long-term interest charges.

 

The actions could affect oil-exporting nations adversely. A lower dollar would cut the value of payments for their oil and gas exports, which would inflict economic pain on these countries because they purchase the majority of their imported goods and services from nations other than the United States. Their real export earnings would be further reduced if they continue to boost production as a means to recapture market share. Indeed, OPEC+’s September 7 decision to increase output for that reason[i], led by Saudi Arabia, will likely fail to raise its income as the dollar’s declining exchange rate offsets any additional revenue received at lower prices.

 

The exporting nations face a quandary because any effort to raise prices and boost income by cutting production will prompt US producers, who are governed by their dollar costs, to increase output. Any attempt to offset a declining dollar with higher oil prices would be a welcome boon for US producers. Thus, the Trump administration’s efforts to weaken the Federal Reserve threaten the economic stability of oil-exporting nations. If the Fed loses its independence, the consequences for oil prices could be significant and unexpected.

 

To receive the full report along with future issues of Notes at the Margin, please Contact Us or send us an Information Request for subscription information.