Currencies and their Effect on Planning in the Oil and Gas Industry

Abstract As the rise or fall of crude prices have a close correlation to the costs of oil and gas exploration and development, E&P companies should understand how the effect of a weaker or stronger US$ can affect their planning and budgeting. The purpose of this paper is not to discuss global or national spending, debt, economic growth or GDP, trade imbalances or geopolitical issues that may have caused this the dollar to weaken to rapidly (or perhaps, non-US currencies to strengthen). The purpose is, instead, to provide E&P business and strategic planners to better understand the relationship between currencies and oil prices. This understanding may assist in valuation, price forecasting, cost budgeting and capital timing requirements for the massive investments that are required to meet the world's growing energy needs. In this paper, original analysis of historical currencies (e.g., United States dollar versus Euro) and their correlation to oil prices are examined; as well as relationships of currencies and crude price effect on public equities and the cost-of-capital implications for global and independent energy companies. Also discussed will be the relationship between oil prices and drilling contract dayrates; as well as methodology to assist in analyses of prospective dayrates. The USD began to devalue in 2002 and the current economic cycle could last much longer than some contemporary scholars believe. It is imperative that engineers and business planners understand key economic and financial drivers when making investment decisions. The reader should gain a better understanding of how oil price and currencies affect their cost-of-equity, and how one may use macro-economic indicators when performing financial analysis and projections.