Wednesday, March 12, 2008

The Dollar and Oil

From Reason Mag:

Let's start with geopolitical uncertainties. Last year, oil consumers watched warily as unrest in Nigeria's oil fields, the possibility of war between the U.S. and Iran, and the antics of Venezuela's Hugo Chavez threatened to disrupt oil supplies. That analysis may have once made sense, but most of those tensions have abated in recent months. Nevertheless, it remains true that most of the world's oil is produced in volatile regions and by erratic governments, so the price of crude must still include some kind of political risk premium.

What effect does the falling dollar have on the price of crude? Most oil price contracts are denominated in dollars. The dollar has fallen in value by more than 30 percent against a Federal Reserve index of major currencies since 2002. This means that the price of imports, including oil, have gone up. To some extent, the chief of the Organization of Petroleum Exporting Countries (OPEC) Chakib Khelil was correct when he said earlier this week, "What's happening in the oil market is due to the mismanagement of the U.S. economy." Continuing U.S. trade and fiscal deficits along with lower interest rates are stoking inflationary fears.

So one of the reasons that oil prices are so high is that the dollar just doesn't buy what it used to. So what does the White House, purveyors of economic stimulus packages and unprecedented government spending have to say about that:

I will say that Dana Perino is smokin'.

Pilfered from Crooks and Liars

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