Weak Dollars, Strong Oil


Reuters reports that “oil rebounded by more than $4 on Monday,” a bounce analyst Carsten Fritsch of Commerzbank said was due to “a combination of the weaker dollar and bargain hunting,” as “some market participants consider the lower price levels after the sharp drop on Thursday a good buying opportunity.”

An earlier report from Reuters noted that average U.S. gas prices hit $4 per gallon this weekend, after a climb of nearly 12 cents per gallon over the last two weeks, but “last week’s fall in crude oil prices may lead to an 8- to 12-cent drop in prices at the pump over the next few weeks.”  Today’s rebound of oil prices makes that happy forecast look a little dubious, especially over the long term.

Those “weak dollars” driving up oil prices are a result of deliberate U.S. government policy – the now-infamous “Quantitative Easing” strategy, which was supposed to entice foreign customers to buy more American goods by weakening the dollar.  It didn’t do much good for anyone, and the rising cost of food and gas are but two of the ways in which it is harming everyone.

America’s struggle with rising gas prices provides a lesson in the nature of currency.  In theory, the value of currency should be relatively stable.  One of the functions of government is providing a reliable medium of exchange, to elevate commerce beyond the barter system.  Much of the strength of an advanced economy comes from the faith consumers and producers place in the value of money, which is obviously far more efficient than lugging gems, precious metals, and livestock to the mall when you want to go shopping. 

These days, and despite all of its fluctuations, oil serves as a more stable “currency” than the dollar.  In fact, a lot of the dollar’s remaining strength comes from its usefulness to the oil market.  Our heavily indebted government relies on massive foreign purchases of the dollar.  Other countries buy dollars so they can use it to purchase oil.  That’s one reason the movement, spearheaded by China, to replace the dollar as a global currency is so troubling.  You’re not going to like what happens when the dollar is no longer the preferred tool for trading in oil – the real global currency.

Our government has been printing dollars like mad, while pointedly refusing to develop oil resources.  That’s not a recipe for long-term reductions in the price of gasoline.  The value of oil is not abstract – its exact price bounces around as the market fluctuates and speculators shake their Magic 8-Balls, but the underlying value of this essential commodity is driven by demand.  Everyone needs it, and by refusing to increase domestic production, our government places our needs into direct and brutal competition with consumers around the world. 

That competition is conducted with a domestic currency whose value has been deliberately reduced.  The cost of producing and shipping virtually everything increases as gas prices rise… then increases again, as consumers who have been mugged at the pump find themselves with less money to make other purchases, pushing down retail demand.  Of course you’re paying more for gas, food, and ultimately everything else.  It would be difficult to point to any policy of this Administration that has not created this situation intentionally.

These high prices contribute to minimal economic growth and high unemployment.  Among other effects, soaring prices at the pump will begin reducing the mobility of the American workforce, as expensive commutes reduce employment options.  Combine these factors, and you might see the return of a rough beast that slouched toward Jimmy Carter’s White House to be born.  If you’re not old enough to remember the late 1970s, ask your parents to explain what stagflation was… or just wait until gas climbs another fifty cents a gallon, and you’ll be able to enjoy it yourself.

Note: corrected a typo in the name of the Quantitative Easing policy, which I had mistakenly called “Qualitative.”