Sense on the Dollar: The Dollar and Oil

Fuel City is a bustling service station on the edge of downtown Dallas, known as much for the acclaimed home made tacos sold at a window in its sprawling mini-mart as it is for its convenient location.

But one thing all the goodies can’t mask is the price of the gasoline. It has been jumping all over the map, and lately jumping higher as the U.S. dollar weakens.

As confounding as that may be to people buying gas, it is not much less so to the man who sells it.

Jeff Morris is the CEO of Alon USA, which supplies gas to Fuel City and hundreds of other stations in the South and West.

“We've gotten to the point where we don't try to predict the dollar to crude price anymore, or the gasoline price," Morris says.

An independent refiner, Alon depends on the margin between the crude oil it buys and the refined products—including gasoline and asphalt—that it sells. Through the first six months of 2009, the company earned $2 million, compared to a $15.4 million loss in the first half of 2008 when the price of oil hit record highs.

But with the price of crude oil rising again as the dollar falls, Alon faces new challenges. (The company reports its third quarter results on November 4.)

Morris, a 35-year veteran of the oil industry, says he has learned over the years to position the company for volatility. But currency fluctuations, he says, are beyond his control.

"I try not to concern myself over things I have no control. And I have very little control over what the dollar's going to do," he says.

And yet the dollar has considerable control over the energy business.

While most oil comes from outside the U.S., it is traded almost exclusively in U.S. dollars. That means investors who are worried about the value of the dollar can easily convert their dollars to oil. Industry consultant Andy Lipow in Houston says investors are doing just that.

"People are deciding, which are we oversupplied more with? Is it the dollar or is it crude oil, and where do I want to put my assets?” Lipow says.

That helps explain why, even in an economy that is still sluggish—with weak demand for oil—the price of oil is around the highest it's been all year.

It also explains why refineries—whose raw material is now more expensive—are raising the price of gasoline, which we pay for at the pump.