Oil and the Feeble Greenback

There are three reasons why oil prices have soared: the weak dollar, Iran and the booming global economy.

The big villain is the feeble greenback. Commodities like oil are priced in dollars. So when the dollar becomes weak, the dollar price of commodities goes up. And when the greenback is strong, the dollar price of commodities goes down.

In 2004 Alan Greenspan, Chairman of the Federal Reserve, made a fateful miscalculation. The maestro, as he was then affectionately called by an adoring media, miscalculated the strength of the U.S. economy. He thought it weak. He was fearful that prices would collapse in America as they did in Japan during the 1990s and the early part of this decade. So to goose the economy, Greenspan created excessive amounts of money. Interest rates were kept artificially low.

But the economy was not weak. In fact, between 2003 and the summer of 2007, the growth alone of the U.S. economy exceeded the entire size of the Chinese economy. In other words, we grew the equivalent of the economy of China in little more than four years. China’s growth rates are higher, but they’re coming off a much lower base.

Yet Greenspan made sure the Fed’s printing presses worked overtime. Thus for the first time since the 1970s and early 1980s, we are faced with a serious inflation problem. Thanks to Greenspan’s blunder, all commodities shot up — oil, cooper, lumber, steel, even the price of mud.

While Greenspan begat the inflationary blunder, Ben Bernanke, the maestro’s successor, perpetuated it. In 2003 the price of oil was around $25 a barrel. A year ago when the credit crisis hit, oil was around $70. Then Bernanke ginned up the printing presses again, this time to deal with the fallout of the busts of sub prime mortgages and other exotic financial instruments and the threats they posed to the banking system. The U.S. economy has crawled to a virtual halt since August 2007 and yet the price of oil has almost doubled. That’s not supply and demand, that’s classic inflation.

Not since the days of Jimmy Carter has an administration been so passive about inflation as this one. So why isn’t President Bush doing something as Ronald Reagan did in circumstances far more difficult than those of today and promptly kill this inflation? Why doesn’t Mr. Bush understand that just as we need a strong military for national security, so too we need a strong dollar for economic strength and security?

Alas, President Bush’s Treasury Department actually likes a weak dollar. These bureaucrats think it helps our trade balance while ignoring the hundreds of billions of dollars more we pay for oil and the havoc that weak money wreaks on the domestic economy. Treasury Chief Henry Paulson is, unfortunately, a captive of this kind of “thinking.”

Another big factor in rising energy costs — one that will become red hot after the November elections — is Iran. The ruling murderous mullahs are hell-bent to get the Bomb and the means to deliver it. Israeli intelligence calculates Iran will cross the threshold in being able to create a nuclear weapon by the end of 2009. Iran recently conducted missile tests that demonstrate that it can deliver such a bomb to Israel not to mention all of Europe. Iran could also use a shipping platform to lob a weapon onto the U.S.

The U.S. has been engaged in fruitless diplomacy with Iran for almost four years. The Israelis feel the window of opportunity to destroy or seriously disrupt Iran’s nuclear ambitions is fast closing. Thus there is a very real possibility that if Barack Obama wins in November, the Israelis will take action before he is inaugurated on January 20. If McCain wins, the Jewish state will probably wait a few months longer to see what will unfold with his administration.

To get to energy: The possibility of a war against Iran has not escaped the oil markets. The futures price of oil spikes upward in early November. The market is thus betting that military action against Iran may well happen — and that would, at least short term, seriously disrupt oil flows. This helps explain why the price of oil in terms of gold has moved up in recent months. Normally the ratio of oil/gold price is fairly constant.

The third reason people are paying so much at the gas pump — and soon with their heating bills — is the global boom which has increased substantially the demand for commodities, including oil. Most oil reserves are controlled by governments not private companies such as Exxon-Mobil. So the ramp up in supply to this increased demand is taking longer than it normally would. Another delaying factor here: The inexcusable unwillingness of Congress to permit exploration and drilling offshore and to do the same in all of ANWAR in Alaska. Tens of billions of barrels of oil and the equivalent amount of natural gas thus remain underground. This is truly a monumental self-inflected wound.

Bottom line: If the Fed ever got its act together and produced a stable dollar the price of oil would drop by at least $50 a barrel. If Iran ceased its nuclear bomb program, oil would drop another $40 a barrel. The remaining $20-$25 increase in oil since 2003 is your traditional supply and demand pressures of the marketplace.