It’s the dollar, stupid!
May 20th, 2008 by Grant in: Economics, Energy, PoliticsThe government response to high gas prices is turning humorous.
Last week President Bush traveled to the Middle East to try and convince the Saudi’s, among others, to start producing more oil to help fend off even higher-yet oil prices.
Their answer: No dice.
Good for them.
President Bush knew the outcome of this little field trip to play the “whoa is we” card before he even boarded Air Force One. After all, Bush is an oil man at heart, and a business man by trade. Not only that, he has some very astute financial and economic gurus that know exactly what’s driving the price of oil.
But he’s also a politician.
The President is also a politician, and he’s still looking for your vote. Not directly, but in a round about way, the Republican party.
His trip to the Mid East ended how those of us who favor capitalism and understand the basics of economic forces knew it would. However, the end result lets the President say: “Well folks, I tried.”
Bring on the lawsuits!
It gets even better! Today, the House voted to approve legislation to let the Justice Department sue the members of OPEC for withholding oil and conspiring to drive up oil prices.
“This bill guarantees that oil prices will reflect supply and demand economic rules, instead of wildly speculative and perhaps illegal activities,” said Democratic Rep. Steve Kagen of Wisconsin, who sponsored the legislation.
Right. Because that’s how it works. Here you have the worlds most developed economy, one that stimulates the global economy, that is forced to import oil to keep the economy liquid, and they’re going to sue the very countries that import that oil?
What’s interesting is that the White House has threatened to veto this bill. Why? Because they know better! It’s one thing to make a visit to ask politely to help us out of a jam. It’s another thing to try and levy baseless financial and legal claims against other countries who control the flow rate to our oil addicted economy.
It’s the dollar, stupid!
The value of the almighty dollar (or lack thereof) is driving the value of crude. Think about it. If your national currency is the Euro, and the U.S. dollar is dirt cheap compared to the Euro, and crude is priced in U.S. dollars, aren’t you going to buy (or import) as much crude as you can regardless of whether you need it or not?
Don’t you think this is why China is developing their own strategic petroleum reserve, and European countries are expanding on their existing ones? It’s not because there is a shortage of oil, it’s because the stuff is cheap because it’s traded in U.S. dollars.
These latest moves by our politicians is nothing more than a farce in an election year to say “We see you hurting out there, and we’re trying our hardest to fix this… but that stinking no good oil man in the Oval Office is working against us all, and he’s the one who’s truly hurting you! Vote Obama!
Another example of our feel good, try hard government trying to understand and remedy a free market.
Tags: Economics | free market | oil | OPEC
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May 21st, 2008 at 6:55 am
I want oil to keep going up. I want to see $6 a gallon gas. Why? It will finally make it feasible to develop alternative energies. We will start to seriously look at solar, wind, hybrid cars, electric cars, coal energy, tar sand oil, etc. if the price of oil stagnates our economy.
We need high oil for a sustained period in order to make these technologies possible. In the 1970s, the oil embargo caused some short term pain (for two years). The alternative energies started to be developed. In fact, a lot of the technologies are no further ahead than then. Once the oil embargo ended and prices dropped, the country went right back to its oil dependency because it was too expensive to develop alternatives (and the oil companies have a hell of a lobbying arm).
I agree that we need a president who can develop an energy policy. We spend less on solar and wind power each year than we spend for 4 days of the Iraq War. However, the government won’t be the leader. The oil, auto, and other parties associated with oil have strong lobbying arms which can slow or completely deter real progress. The free market will rule if the price of oil slows the economy.
May 21st, 2008 at 8:18 am
The problem with crazy oil prices is in New York! the commodities market. The money people ( wall street investors) are hedging their failing portfolios by investing (bidding up) oil futures. I believe in open markets and the natural way of the economy works. But I have a real problem when there are no options or alternatives to oil/gasoline. I can do without cotton, soy beans etc. but my car runs on gas.
These investors are making money on us people that have no resources to hedge. This has to stop. it’s cripling the rest of the economy and many people have to decide on gas or food purchases
May 21st, 2008 at 11:21 am
Although I agree with you that a weak dollar has been part of the catalyst for higher crude, the beef of the catalyst has been demand…..not only demand from users, but demand from speculators….
May 25th, 2008 at 5:31 pm
I completely agree with you about the pathetic actions of the current administration. Let’s see, when they came into office, oil was around $20 a barrel and Bush touted his strong relationships with the Saudis.
I disagree that the run up in oil price is completely due to the dollar. Oil has doubled in the last year but the dollar has not depreciated nearly that much.
As you know, in my blog, http://www.evolutionshift.com I predicted $125 oil in 2008 more than two years ago and I know little of the currency markets. I do know that oil demand is surpassing current supply, that refining capacity is maxed out and I completely believe we are going through Peak oil
I have also said that oil could quickly go to $200 a barrel if oil were priced against the Euro. Remember, the headquarters of OPEC is based in Vienna, so that would not be too far fetched.
David
May 26th, 2008 at 8:53 am
David you’re correct, the dollar decline is not the only stimulus to oil. But it is the the key facilitator to allowing the Chinese to buy all the oil they can get their hands on.
If the exchange rate were reversed, I think you see demand for oil slow in China, not because consumption has dropped, but because it’s less attractive to fill their new SPR at current exchange rates.