In our world today, especially if you live in the United States, oil is a very large part of our lives. And I am not just talking about the gas that you put in your car, but also the oil that heats your home, the plastic that goes into your water bottles and credit cards, and even the cleaning agent that your dry cleaner uses to clean your favorite suit.
With so much of our lives dependent on the price of crude oil, any astute investor should realize the powerful correlation between oil and their portfolio and seek to understand how we got where we are today. Especially for Forex traders who focus on the value of the dollar relative to other currencies, you must know how the oil industry became the 'Big Oil' that we know today.
Rockefeller and The Standard Oil Company
In 1870 John D. Rockefeller founded the first Standard Oil company in Ohio, which was the start of a new highly controlled corporate animal that would eventually become the oil industry that we know today. For over 35 years, Standard dominated the oil industry in true robber-baron style, controlling state and federal government by having more money than they did and dishing out bribes that were too great to refuse.
Many different companies were formed such as Standard Oil of New York and New Jersey, but they were all controlled by the single ruthless parent company. In 1906, attorney general Frank Kellogg started a case against Standard Oil which took over 5 years to conclude, but in 1911 it was ruled that Standard Oil was a monopoly which had to be broken into smaller companies.
Now do you recognize the names Chevron, Mobil, and Exxon? Exxon used to be called Standard Oil of New Jersey, Chevron used to be called Standard Oil of California, and Mobil was Standard Oil of New York. This is how the oil industry became 'Big Oil,' and even after the breakup of his company Rockefeller still controlled 25% controlling stake in each company.
Oil Prices and Exchange Rates
The major currency pairs that most forex traders focus on have the US dollar as either the base or counter currency, so any trader that knows the value of the dollar can make money by either buying or selling the dollar against other currencies. An increase in the price of crude oil does not just affect the pocketbook of the average American citizen, but since the US is largely an oil-importing country an increase in oil prices can have an inverse effect on the value of the dollar, meaning that a profit opportunity arises to sell the dollar against other major currencies.