It’s the dollar, stupid
Posted by BrianFrom Steve Forbes to Ron Paul, many have recognized the true cause of high oil prices. It’s isn’t greedy oil companies who need to be deprived of their “windfall” profits. The culprit is our weak dollar.
In order to see for myself how the performance of the dollar has affected oil prices I did what any engineer would do. I looked at the numbers. I did so by comparing the “value” of oil relative to two currencies, the dollar and the Euro, and one commodity, gold. I identified daily trading data for oil, gold, and the Euro going back to the beginning of 2000 and plotted the value of oil in terms of dollars, Euros, and gold relative to its value at the beginning of the time period. The results are striking.
The figure clearly shows that since 2002 the price of oil in dollars has increased dramatically. In late 2001/early 2002 oil was about 0.7 times what it was in 2000 in terms of dollars. By the middle of 2008 it was 5.7 times the 2000 price. That is an 837% increase in less than seven years. (It is currently 526% above the 2001 low) The Euro hasn’t done great, but has bested the dollar. Gold, meanwhile, has been quite stable. It has remained approximately on par with oil.
The clear conclusion is that while demand most certainly contributes to the price of oil (in dollars) it is actually the debasement of our currency that is making Americans feel the pain of inflation. Don’t hold your breath waiting for a legitimate politician to recognize this or pledge to fix the problem.
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September 20th, 2008 at 6:43 pm
I’ve been harping on this for years, but no legitimate politicians have the fortitude to propose what needs to be done to rectify this problem. While I am sure we would differ on the role of government, and how exactly to correct this problem, why isn’t their a mainstream politician who can champion this cause? I pessimistically believe that we enjoy sucking on the government tit to much to question what we are doing to our long term economic/military security. At some point we will have to pay for the overspending in the 80’s and now, and it will come in the form of us having to make tough choices about the economy that will inevitably lead to short-term negative economic problems (as we undoubtedly take Chinese money out of the economy), but will give us leverage with the Chinese when we finally tell them to keep their money. I will keep posting about the dollar dropping, as I have for years, but nobody will listen. We will cut taxes, but increase spending, or raise taxes and increase spending, there is no other viable alternative.
September 20th, 2008 at 6:49 pm
Talmadge, the reason for no legitimate politician (of either party) is regrettably simple. Addressing the problem will involve painful spending cuts. We can’t solve the problem by electing random legislators - it has to be the president. He/she is the only one, by virtue of the veto power, that can bring about real change. We saw how well Ron Paul did by credibly promising to cut spending. I’m not sure what it will take for people in this country to wake up and vote for someone willing to get us on the right track instead of the person who promises to grow every facet of government.
September 21st, 2008 at 5:49 am
Rather than saying we need credible politicians to propose what needs to be done, I’d say we need credible office holders in leadership positions who have the power to get things done. I consider Ron Paul to be a credible politician but he hasn’t secured a leadership role. The people in leadership positions who have the power unfortunately aren’t students of economics and don’t have a clue as to what is needed. What they have done and continue to do fits the definition of insanity.
September 21st, 2008 at 9:31 am
My definition of credible is someone that the establishment listens to enough to take seriously or someone that is in leadership. I like Ron Paul, but he will be viewed on the margins of history because no one takes him seriously. He almost archived something this year by moving people, but without a primary win, he is largely an afterthought.
To Brian’s point, I understand what is at stake, and I know WHY we won’t see anything legitimately done, politicians run the government in cycles. A President runs every 5-years, Senator 6, House 2, and they run the government accordingly. An economic program that would see a downside for the first 7 years or more isn’t gonna get any support. I was basically just venting about it. Where are the patriots now? It sure hasn’t been either of my choices for President.
September 21st, 2008 at 10:28 am
As to whether Ron Paul is a credible politician or largely an afterthought that will be viewed on the margins of history:
The establishment may still be not listening to him. Only time will tell whether it is hearing him now loud and clear but still won’t publicly admit it because it still has no clue as to how to proceed, or fears to proceed as it should.
Media, on the other hand, seems to have recently (as an afterthought, apparently) taken a greater interest in his thoughts, opinions, and advice now that our financial situation is deteriorating just as he said it inevitably would over time.
September 21st, 2008 at 10:32 am
And there’s the rub, trying to find a Caesar who can fix things, yet will step down and stay home when his successor immediately unfixes things.
Not to mention trivial matters like riots when the grocery stores empty, unemployed bureaucrats roaming the streets and cannibalism among unemployed realtors (maybe there is a silver lining).
September 21st, 2008 at 4:36 pm
I must admit that I thought twice about writing what I did about Mr. Paul (couldn’t get Goldwater out of my mind), but I am pretty steadfast in still believing what I wrote. He challenges conventional wisdom too much to be take seriously.
September 21st, 2008 at 4:44 pm
Well, TE, we see what conventional wisdom has done for us.
September 21st, 2008 at 5:28 pm
For giggles, guesstimate of cash readily available, about 1400 billion.
At 2007 prices, the US Mint (pdf p.46) has about 180 billion in gold and silver on hand.
September 21st, 2008 at 6:44 pm
I found a graph very similar to yours here: http://www.thedailygreen.com/environmental-news/latest/oil-gold-commodities-47041507
The author makes the point that the plot of oil price in terms of gold being flat just demonstrates “parallel growth in commodity pricing.”
It’s not clear to me how your graph shows that “it is actually the debasement of our currency that is making Americans feel the pain of inflation.” Or more specifically, it doesn’t clearly show how much of the increase in price is due to increasing demand for oil and how much is due to the weakening dollar - or due to other factors. It simply shows the effect of all the factors combined.
September 21st, 2008 at 7:45 pm
“Parallel growth in commodity pricing” - in terms of dollars. Because the value of the dollar has gone down relative to those commodities.
It would be interesting to see a variety of commodities over the same time span.