A different way to look at the impact of oil prices—and what it might mean for the future.
The forces of supply and demand alone cannot explain oil prices, writes Oh. The value of the U.S. dollar and oil prices are linked, while history shows that geopolitics and oil are inseparable. A fund manager for a Korean asset management firm, Oh analyzes the enigma of oil from a financier’s perspective. The result is an alternative interpretation of the history of oil, particularly the oil price “shocks” of 1973 and ’79. The Oil-Dollar Composite Index, which accounts for changes in both oil prices and the dollar, is used as a tool for understanding the fallout from oil shocks. Oh makes a case for the ODCI, with easily digestible prose and helpful graphs. A thumbnail history of the oil industry and floating-exchange-rate system provides suitable background for the general reader, though the lack of footnote citations may frustrate some researchers. The author convincingly puts oil at the center of a power struggle among nations, from the dividing of the Turkish Petroleum Company after World War I to the Arab oil embargo of 1973-74. The author then turns toward economics. He argues the dollar has a “leveraging effect” on oil prices. If oil and the dollar move rapidly in the same direction, the impact is significant. The Latin American debt crisis of the ’70s and ’80s is used to demonstrate how a surging ODCI acts as a “misery index” for developing countries and a “happiness index” for developed nations. Conversely, the Soviet Union suffered as the world’s top oil producer when oil and the dollar plummeted in 1985. Like any investor, Oh is ultimately concerned with the future. He believes a third oil shock may be looming. Most ominously, oil-thirsty China could be the biggest loser. Given China’s role as the world’s second largest economy, it’s a hypothesis that gives pause. Oh presents his case in a logical, step-by-step manner, allowing the past to be his guide. Unlike many economics texts, the book’s message can be grasped by those with only a journeyman’s knowledge of the subject. It’s a risky business trying to predict the future of oil prices, but Oh bravely peers into the crystal ball and finds that history may repeat itself. Time will tell.
An investor’s warning to be ready when oil and the dollar dance.