A:

Yes. No. Maybe. Definitely.

There's no easy answer to this question. While many theories abound, the reality is that oil prices and interest rates have some correlation between their movements, but are not correlated exclusively. In truth, many factors affect the direction of both interest rates and oil prices. Sometimes those factors are related, sometimes they affect each other, and sometimes there's no rhyme or reason to what happens.

One of the basic theories stipulates that increasing interest rates raise consumers' and manufacturers' costs, which, in turn, reduces the amount of time and money people spend driving. Less people on the road translates to less demand for oil, which can cause oil prices to drop. Thus, in this instance, there might be what we'd call an "inverse correlation" where one thing rises and the other drops.

By this same theory, when interest rates drop, consumers and companies are able to borrow and spend money more freely, which drives up demand for oil. The greater the usage of oil, which has OPEC-imposed limits on production amounts, the more consumers bid up the price.

Another inversely correlated theory, which can occur simultaneously with the first, proposes that rising or high interest rates help strengthen the dollar against other countries' currencies. When the dollar is strong, this helps American oil companies to buy more oil with every U.S. dollar spent, ultimately passing the savings on to consumers. Likewise, when the value of the dollar is low against foreign currencies, something that can happen with sinking interest rates, U.S. dollars buy less oil than before. This, of course, can contribute to oil becoming costlier to the U.S., which consumes 25% of the world's oil.

With all that said, factors such as hurricanes, wars, increased efficiency of new cars, lowered OPEC output, and changes in domestic oil production all can have uncorrelated effects on oil prices. Just when you thought oil prices should go up or down opposite of interest rates, they do something entirely different. Even the fear of occurrences such as natural disasters and wars can cause oil prices to spike just when they should be dropping, as seen over the last decade.

For more on this topic, read Forces Behind Interest Rates and Why You Can't Influence Gas Prices.

This question was answered by Ken Clark.

RELATED FAQS
  1. How does the price of oil affect the stock market?

    Read about how the price of oil might impact the stock market and why economists have not been able to find a strong correlation ... Read Answer >>
  2. What causes oil prices to fluctuate?

    Discover how OPEC, demand and supply, natural disasters, production costs and political instability are some of the major ... Read Answer >>
  3. Why are stocks and oil so correlated right now?

    Learn whether the stock market and oil prices will continue their highly correlated price relationship or decouple again ... Read Answer >>
Related Articles
  1. Investing

    How Does Crude Oil Affect Gas Prices?

    Find out how this commodity's fluctuating price affects more than just how much you pay at the pump.
  2. Investing

    Oil Boom 2.0: Be Sure You Are Ready to Invest

    Learn about the potential for oil boom 2.0, and discover why some experts say this is a good time to invest in oil companies and ETFs.
  3. Insights

    Who Wins With Low Energy Prices? 

    Low oil prices are here to stay for some time. Which economies will benefit or lose from the low oil price regime?
  4. Investing

    Effect of Fed Fund Rate Hikes on Oil

    Find out how oil markets might react to an interest rate hike by the Federal Reserve, and why consumers and bondholders could love a rising interest rate.
  5. Investing

    Investing in Oil Stocks vs. Oil Companies: What's the Difference? (USO)

    Learn about the major advantages, disadvantages and risks of investing in oil companies and investing in oil and gas exploration companies.
  6. Investing

    Peak Oil: What To Do When The Wells Run Dry

    Find out how to invest and protect your investments in this slippery sector.
  7. Investing

    What Drives Oil Prices?

    Have you ever wondered why oil’s price fluctuates more than the value of other investments?
  8. Investing

    Who is Most Affected by Lower Oil Prices?

    With low oil prices affecting just about everyone, from citizens to corporations to entire nations, we look at who wins and who loses with the price drop.
  9. Investing

    What Needs to Happen for Oil Prices to Go Up?

    Understand what is happening to global oil prices and why they are so low. Learn about key factors that can lead to the increase of oil prices.
  10. Investing

    Looking to Invest In Oil? Be Patient

    Learn about the best time to pick a bottom in oil. Oil prices have been destroyed due to excess supply and slowing demand from a slow global economy.
RELATED TERMS
  1. Peak Oil

    A hypothetical date referring to the world's peak crude oil production, ...
  2. Oil ETF

    A category of exchange-traded funds that invest in companies ...
  3. Crude Oil

    Crude oil is a naturally occurring, unrefined petroleum product ...
  4. Unconventional Oil

    A type of petroleum that is produced or obtained through techniques ...
  5. Initial Production

    The measurement of an oil well's production at the outset. Initial ...
  6. Oil Price to Natural Gas Ratio

    A mathematical ratio comparing the prices of crude oil and natural ...
Hot Definitions
  1. Co-pay

    A type of insurance policy where the insured pays a specified amount of out-of-pocket expenses for health-care services such ...
  2. Protectionism

    Government actions and policies that restrict or restrain international trade, often done with the intent of protecting local ...
  3. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
  4. Demonetization

    Demonetization is the act of stripping a currency unit of its status as legal tender and is necessary whenever there is a ...
  5. Investment

    An asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic ...
  6. Redlining

    The unethical practice whereby financial institutions make it extremely difficult or impossible for residents of poor inner-city ...
Trading Center