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The U.S. Dollar Exchange Rate and the Demand for Oil

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Using recent advances in panel data estimation techniques, we find that an appreciation of the U.S. dollar exchange rate leads to a significant decline in oil demand for a sample of 65 oil-importing countries. The estimated effect turns out to be considerably larger than the impact of a shift in the global crude oil price expressed in U.S. dollar. This finding appears to be the consequence of a stronger pass-through of changes in the U.S. dollar exchange rate to domestic end-user oil products prices relative to changes in the global crude oil price. Furthermore, we demonstrate the relevance of U.S. dollar fluctuations for global oil price dynamics.

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JEL Codes: Q41: Energy: Demand and Supply; Prices, Q40: Energy: General, Q35: Hydrocarbon Resources, Q31: Nonrenewable Resources and Conservation: Demand and Supply; Prices, Q02: Commodity Markets

Keywords: Oil demand, U.S. dollar exchange rate, Oil price pass-through, Panel data

DOI: 10.5547/01956574.36.3.ssch

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Published in Volume 36, Number 3 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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