The Oil Price Denomination Fallacy

Repeat after me: The fact that oil prices are denominated in dollars means…

absolutely nothing. Dean Baker has been banging

this drum for a few days now, most recently attacking

the Washington Post for saying that "since crude oil is priced in dollars,

a weak dollar makes oil cheaper abroad and high prices in dollars more sustainable."

Dean likes to show how ridiculous this kind of commentary is by saying that

it wouldn’t matter if oil were denominated in gallons of peanut butter. But

obviously that isn’t working, so let me try another tack.

There are two things making headlines for hitting all-time highs right now:

oil, and the euro. Both of them are denominated (measured) in dollars. So let’s

see what the Washington Post’s sentence would look like if we substituted "the

euro" for "crude oil":

Since the euro is priced in dollars, a weak dollar makes the euro cheaper

abroad and a high exchange rate more sustainable.

A weak dollar makes the euro cheaper abroad, in places like Japan

or Brazil? I don’t think so. And of course the sustainability of the exchange

rate has nothing to do with the level of the exchange rate.

(By the way, it’s not just the Washington Post and NPR who are making this

mistake: Ben

Stein does it too. Which should in itself persuade journalists across the

nation that they should stop talking such nonsense forthwith.)

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