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The Rising Price Of the Falling Dollar

From Forbes.

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Do you know why oil and prices are moving sharply higher? Some blame the oil companies, charging they are manipulating prices. Others cite U.S. sanctions on Iran and the threat of a military encounter that would disrupt the flow of oil from the Middle East.

Speculators, too are blamed for ostensibly bidding up the price of oil. In the political arena, President Obama is taking credit for increased domestic oil production even as his critics point out the slow pace of drilling permits issued by his Administration soon will hamper additional increases in the U.S. oil production.

Yet, the basic reason for higher energy prices is being overlooked, even though it is right before our eyes: Oil prices are up because the value of the dollar is down. Our common sense hides this source of higher prices because we view the dollar as fixed, and prices as moving. News reports explain the sharp rise in consumer prices in February were caused by higher energy and food prices, implying that higher prices cause inflation. Of course, higher prices do not cause inflation. Higher prices are inflation.

The cost of this deception goes well beyond the vilification of the oil industry and free markets. The real price of the on-going debauchery of the dollar is measured by the loss of our prosperity and the debasement of our liberty.

Neither the dollar, nor the price of individual items are fixed. Changes in the relative prices of goods and services occur because of technological change or shifts in supply or demand. The price of computers and televisions fall relative to the price of, well, just about everything. On the other hand, the freeze earlier this winter in Florida reduced the supply of oranges, leading to an increase in the price of orange juice. But, the value of the dollar also changes, usually in ways that are imperceptible over short periods of time. As a consequence, when the dollar price of gasoline rises 6% in a month, as it did in February, it appears that the price of gasoline is up, rather than the value of the dollar is down.

To see more clearly how the price of the dollar has changed, it helps to view price changes over a 10 year period. Since 2002, the price of a barrel of oil has increased four-fold, to $107 last Friday from $26 in 2002. To suggest that oil companies had enough power to impose such a price increase, or that speculators are responsible for a quadrupling of the price of oil is, on its face, preposterous. Instead, the price of oil and gasoline are up because the Federal Reserve has driven the value of the dollar down.

For example, if the dollar since 2002 had been as good as the:

• Chinese yuan, the price of oil today would be $82 and a gallon of regular gas would cost about $3.10;

• Euro, the price of oil today would be $77 and regular gas would cost about $2.90;

• Japanese yen, the price of oil today would be $71 and regular gas would cost about $2.75;

• Swiss Franc, the price of oil today would be $63 and regular gas would cost about $2.50.

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1 reply »

  1. “However, we do not see how the hundreds of billions of dollars of shareholder money put at risk to find and develop those vast new supplies of oil and natural gas have put downward pressure on energy pricers.

    (Instead, when we experience higher gasoline prices, we intuitively know the nominal value of the oil in the ground developed with 2002 dollars has gone up right along with the price of gasoline, producing unbelievable profits seemingly at our expense. But, the paper dollar system, not the oil companies or, by implication, free markets, are to blame for the resulting windfall.”)

    A. They didn’t find any. (or not enough to mitigate the decline in existing field production”

    B. Failed to account for demand increase as a result of population increase and “rising living standards” (higher consumption).

    This “fiat dun it!” teabagger bs is getting real tired. This is not a systematic glitch, this is a structural collapse.

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