Why Are We Paying $89 A Barrel for Oil? (Answer: It's Not What You Think)
| Wed Oct. 17, 2007 4:43 PM PDT
Oil hit a new high today, $89 a barrel. Some analysts predict it will soon hit $100. All this has caused much anxiety in the markets and handwringing in the press, which has generally attributed the increase to 1) unrest in the Middle East 2) increased demand, particularly from China and India and 3) speculators.
Okay, so all of these things are a factor to some extent. But what analysts and pundits generally fail to point out is another reason for high oil prices in the U.S. market is the devaluation of the dollar. If it weren't for that, oil would cost about $60 a barrel, as it does effectively does in Europe and Canada. On George W. Bush's inauguration day in January 2001, you could have purchased a barrel of oil for about $30. If you lived in Europe, a barrel would have set you back about 32 Euro. Because the value of the U.S. Dollar has fallen so substantially since then (it took 93 cents to buy a Euro in January 2001, it now takes $1.42), the increase in the cost of oil for a U.S. consumer has far outstripped the increase for a Euro (or Canadian, or Swiss, or just about any other) consumer.
Today, it takes US $89 to buy a barrel of oil, but only 62 Euro. Going from 32 Euro to 62 is a healthy rise, but is less than a 10% annual increase since Bush has been in office. By contrast, the move from $30 to $89 is nearly a tripling, or more than 17% per year. See this chart, where the price of oil in U.S. dollars is represented in white while the price in Euros is in red:
Thus, of the $59 increase in the cost of a barrel of oil to a U.S. consumer, more than $30 is due to the depreciation of the U.S. Dollar and the fiscal and trade policies that have contributed to it. Not Middle East tensions, not China's increased appetite, etc. Same thing is true with skyrocketing price of gold; gold is going through the roof, sure, but what's really happening is that the dollar is going through the floor.
Many things have led to the devaluation of the U.S. Dollar. But a big portion of it can be attributed to a growing deficit. Now some, like MoJo contributor James K. Galbraith, would argue that deficits per se aren't bad. But the problem with this deficit is that it is largely attributable to 1) runaway spending on a disastrous war with no end in sight—in fact the chart shows how the divergence between currencies really starts to pick up following the invasion—and 2) massive tax cuts to the wealthy.
And that ain't good.
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Continued From Above
Comments
Submitted by Misanthropic Scott (not verified) on Wed Oct. 17, 2007 9:56 PM PDT.
I wonder whether the devaluation of the dollar just might have something to do with the fact that immediately BEFORE THE WAR IN IRAQ STARTED, the debt to GDP ratio of this country hit A NEW RECORD HIGH. The prior record had been hit in, you guessed it, OCTOBER 1929!!!
Anyone think that the half trillion bucks we spent on our imperialistic war for oil just might have made things just a tad worse than that? I do.
does anyone besides Ron Paul and libertarians ever consider the negative impacts of having a fiat currency, rather than a currency based on something of real and known value?
not to even bring up the fact that inflation really amounts to an invisible tax.
full faith and credit of the u.s. government?
we have no faith, and they're worthy of no credit, so what would you expect?
Submitted by Misanthropic Scott (not verified) on Thu Oct. 18, 2007 1:38 PM PDT.
jet,
Yes. I do. Further, I notice that when our currency was pegged to gold, we didn't have to put 'In God We Trust' on it. It seems like we said, 'Oh [DELETED]!! We're out of gold. God help us now!'
LOL, Scott!
i got a strong hint of exactly what sort of 'bubble' our national economy was when they even took the copper out of the penny, and started producing them from zinc with copper plating, a couple of decades after taking the silver out of 'the silver' as we used to call it.
talk about how we've 'devalued' the currency! you can't do it any more literally than that
it won't be long before they take the nickle and copper out of the 'silver' and replace that with something cheaper still
$100 oil and a cheap dollar is just the cost of empire. The IMF said the dollar is still overvalued. Devaluation is a risk free form of taxation without the politicians getting blamed. We have gutless politicians. Look at the Romans. That is our future. Less Empire, more country. Lock and load.
Submitted by Chris Taylor (not verified) on Thu Oct. 18, 2007 4:53 PM PDT.
"not to even bring up the fact that inflation really amounts to an invisible tax."
I certainly would not call it invisible. Deceptive sure but not invisible. Inflation hurts visibly and its painful. Makes saving money a waste of time. The longer you hang on to it the less value it has. People just do not recognize it for what it is. Only one type of process MAKES money on inflation and thats anything driven by PERCENTAGES which means Government and Banks (CC companies included in banks)
IE a fiat based currency with constant inflation benefits ONLY governments and banking institutions IE the rich. Hence why ours is designed to work that way.
Woah, wait a minute. European gas prices are astronomical compared to here. Until somebody shows me some more statistics, I might as well be shoveling crap onto a HTML file if I use this as evidence for real inflation and its effects on the economy.
One reason that gas is so high in Europe is because of taxes. They use the gas tax to pay for a lot of things. I have friends that live in the U.K. he said something about gas taxes paying for him to go to school and something else.
Long story short. Gas is cheap, taxes aren't.
Nice graph, I agree with the Libertarians, that the Fed's actions with those of the Washington (since the New Deal) are the cause of our worries. Bring on Ron Paul, sell off the Fed for office space, plan the federal budget for a constant surplus, privatise social security, phase out government health care, etc. The way this country is run, will be our downfall if we don't change now! Ron Paul 2008
According to the U.S. Department of Treasury, since Sept. 2006 the national debt has been increasing by $1.47 billion a day. Our national debt is currently over $9 trillion. For the last two years, the Congress voted to raise the national debt ceiling. They did this to allow the federal government to continue making interest payments on our foreign loans...Basically, so that China and Saudi Arabia would not repossess the country!
It is very easy to blame current energy prices on malevolent Arabs or sky-rocketing home prices on greedy developers. However, we must face the fact that because of runaway spending, our dollar will simply not buy as much as it would a few years ago.
In November 2005, the Federal reserve announced it would no longer publish the M3 money aggregate (the worldwide total U.S. dollar supply). Their press release claimed: "the costs of collecting the underlying data and publishing M3 outweigh the benefits." The announcement received absolutely no coverage from the mainstream news media.
The federal government is printing up money at unprecedented rates just to keep up with Bush's spending habits. The unconscionable behavior is now de-valuing our currency and it will eventually spell disaster for all Americans.
Supply and demand. If there was an abundance of supply, the price would be lower. There is not enough supply to meet demand, therefore the price is higher. Also, oil = money. The US has very little oil. Therefore, over time, the US dollar will continue to fall.
This may be true, but whatever the cause, I'm glad to see it. Higher gas prices are the only way the US is going to start moving forward in transportation options and technology.
And don't forget - the only reason prices are as low as they are is because we subsidise the price of gas via our military - in otherwords, we are ACTUALLY ALREADY paying something like $6-$10 per gallon depending on who you ask - quite literally out of your pocket as a percentage of your income tax. Not to mention the probably money spent on healthcare to combat pollution related illnes..
the 89$ price is in the OIL FUTURES market, the actual cost of gasoline is LOW in comparison to the price per barrell. yes low. gas was near 3$ bucks nationally when oil was 65% a barrell, wether it is merely a delay effect for gas prices we shall see, but their are definitely other factors including supply.
If the fed doesn't reverse policy (not hold rates steady) I beleive consumer price inflation will double the cost of wheat, soy , and other food products, as well as very significant increases in cost of new goods imported (very bad for domestic business's and their costs) but good for balancing a trade deficit, and multi national company's exporting goods that are all of a sudden cheap in "emerging country's".
The powers that be, prefer to keep things deceptive and on the down low, so i am not sure how they will be able to hide or deflect such big price increases, perhaps their will be a war to deflect anger.
IF OPEC continues to diversify their dollars in their soverign wealth funds (where all the money is) not the central banks of such country's, we will have price inflation regardless of what the fed does.
This article is total nonsense. Oil is priced in dollars not Euros. The Europeans are damned lucky the dollar is devaluing ... it keeps their oil cheap-ish.
Iraq, Iran and other oil nations are getting screwed as they are being paid in USD which are worth **** all. They now want to price their oil in euros.
That would really hurt the US! Guess what the war is about....
Ralph- Sure, oil is usually traded globally on a dollar basis, but remember that we have functioning FX markets and that money is fungible.
Why does this matter? It still only takes 60 Euro to puchase a barrel of oil. And yes, you have to do an FX trade to convert 60 Euro to $89 before you buy it, but that doesn't weaken the point this article is making
What should America expect considering it is all but legally bankrupt (creditors have not called in the money, that is all) ; and your government continues to print more money devaluing it all the while; and you continue to borrow from other nations who, for the time being, are waiting to enforce their economic might on your broken republic.
The entire scenario is laughable because the big bully is finally starting to feel the ramifications of pushing everyone else around.
This has nothing to do with American people, and all to do with the governments (specially this one with one of the all-time biggest a**holes and ***-ups in political history at the helm) it has been encultured and brain-washed to adopt.
And if you compare the chart converting Euros to Dollars you see that Europe pays just as much as we do for oil. All you are doing is comparing exchange rates. Yes, the Dollar is falling compared to the Euro. The net effect is that Americans pay more for imported goods. If the Dollar gains then we pay less compared to the Euro. True for oil, true for everything else. Good spin though by using oil as the comparison.
Submitted by Money (not verified) on Thu Oct. 18, 2007 8:47 PM PDT.
Are these gas prices going to be an issue in 30 years or is gas going to be a thing of the past...
Submitted by Legacy on Thu Oct. 18, 2007 11:33 PM PDT.
Actually, one reason milk prices are so high is the huge increase in the price of corn, which is directly related to the fact that corn is being diverted into ethanol (rather than feed/food). Supply and demand. Unfortunately, corn-based ethanol is takes almost as much energy to produce as it generates. Switchgrass and other celulosic ethanols would be better, but hey, that wouldn't benefit ADM.
Submitted by JLouis (not verified) on Fri Oct. 19, 2007 4:23 AM PDT.
I was surprised to read your article. Oil price cheaper in the EU...? Hey, that's new!
In reality oil prices are relatively higher in the EU than in the US and Asia, not because of different sourcing (free markets!), but because of government taxes...
Just look at the size of our cars compared to the US cars... more fuel effective, lower cost to 'operate' a car here (well it depends...), because of high oil prices (again, taxes...).
Anyway, you cannot compare oil prices in Euro and dollar, currencies measure exchange rate, which measure the supply and demand of a currency (depending of many factors such as interest rates, commercial balance, ...).
If you use the same currency (e.g. Euro) to measure relative prices in the US versus EU (or parity techniques such as PPP), you will eliminate currency fluctuation, and thus have a better measurement tool to review the impact of inflation...
Sorry...
Well, at least, that's what I learned in my (US!) MBA classes...
It is this very intelligent American philosophy, "we're above good and bad, it's a right (not a privilege) to drive your fat ass (~200 pounds) in a car that weights ~6000 pounds". It is very logical. How many Americans would consider buying a car that needs only 5 liters gasoline for 100 km? (sorry for the *evil* international measurements). It is OK in the *holy* USA to drive a car that needs 25-40 liters for 100km. Really, who cares of global warming, wars in the middle-east, hunger in Africa, etc....
Those who complain that in Europe, gasoline is more expensive fail to see the point.
Gasoline is heavily taxed in Europe, but that money remains in our society: it's redistributed to other projects. Whereas all the extra cost for US consumers because of the falling dollar is lost to the oil exporters.
To the person who suggested higher interest rates: remember, you're in the middle of a bad credit crunch. Increasing interest rates would make the situation much, much worse. So my American friends, you really are in a catch-22 situation.
This could be time for a nice little Schadenfreude for us, however, we will also pay the consequences of your stupid behaviour (crazy debt, war, immoral credit, etc) in due time. Better start learning Chinese soon.
Mig, i believe it's the government who benefits by having the money, when we spend it, be worth less than the money was when we earned it
how would the difference in value be transferred to oil exporters when the value of the currency they receive is less than it was in the past?
only the gov't seems to benefit from inflation or devaluation, because they dump additional currency on the market when the dollar is at the higher rate, and the value of all dollars decline after they've done their spending spree
jet: I disagree with your first comment (and I think this is a fundamental difference between our societies :) . Take healthcare: it does not matter if money is spent by the government for mostly free healthcare, or by individuals for privatized healthcare. The same amount of money (roughly) will be spent, for the same added value. From a macro-economic point of view, it makes no difference on the GDP.
It's true that we pay more in taxes, but we get that same money back in public services. So I don't agree with your statement that it's "worth less than the money was when we earned it"
Concerning the second point, ou ask: "how would the difference in value be transferred to oil exporters when the value of the currency they receive is less than it was in the past?"
Because you need to pay more of that devaluated currency for the same amount of products. The exporter gets the same value, while you pay more.
And you pay more because within an economy, inflation is invisible. Prices, salaries, and taxes are not modified but when you buy from outside sources, you need to pay more.
An argument I often hear is that while it's bad for imports, it's good for exports. That's true. However, that works when you export more value than you import. As you know, this is far from being the case for the USA.
Euros are so funny and stupid. They say along the lines of "fat americans 6000 lb cars, starving Africa, we pay higher fuel taxes" and all that kind of crap.
Cars that get 6 miles to the gallon? You're sorry for "international measurements", another meaningless Euro term.
100km is about 60 miles (62.7 if memory serves me correctly), and 40 litres would probably be about 10 gallons. Our cars don't get 6 mpg morons. Hey Euro idiot, my TRUCK get's ~21 - 22 mpg average.
Once again Euro trash thinks taxation is the answer. The funny thing is, they pay higher taxes yet there is all the "negative stuff" in the world they blame the US for!
IDIOTS
sorry Mig, but i don't see any entity benefiting from inflation but the government, that sucks the value out of it's currency
it's a way to tax us without passing a tax bill, and that's why i referred to it as a 'hidden' tax. the effects of inflation are not hidden, but the fact that the gov't benefits is why the TAX is a hidden one
another place where Ron Paul hits the bullseye:
www.house.gov/paul/tst/tst2006/tst071706.htm
it's obvious that with inflated or devalued currency, i shell out more pieces of paper for fuel, but when the oil exporter eventually gets those and spends them, they have no greater value for him than they did for me
jet: Ron Paul is indeed your last chance at having a decent President :)
An old french politician said it best:
What do you do, as a government, when your expenses are higher than your income ?
- If you're a left-winger, you increase taxes
- If you're a right-winger, you decrease expenses
- If you're a demagogue, you increase debt
Concerning the export/import example:
Year 1:
You pay $100 for a 100% US-made product, and your salary is $100. You also pay $100 for an imported product.
Year 2: Your currency has been devaluated by 10%.
You still receive $100 as a salary, and you still pay $100 for the same US-made product (invisible tax, remember ?). But now, you have to pay $110 for the imported product.The exporter gets the same value, but the cost to you is higher, because it's the only item which has changed in the equation. Makes sense ?
Mig, the example makes sense, but in year 2 the foreign supplier still only receives currency that amounts to the same value as year 1, because the currency is worth less.
devaluation of US currency has not benefited him
he has 110 dollars in year 2 but they won't buy any more for him than the 100 would have a year before
only the US government has benefitted from the devaluation, not foreign oil exporters
a fiat currency, rather than a currency based on something of real and known value?
The main problem I have with any reference to the old gold standard is that its "value" is no more real than any currency not based on it.The "value" of gold is just as arbitrary.If all of the people you want to deal with aren't interested in gold then it has no "value".Now food, on the other hand, is something that will always have "value" to anyone alive.
governments, empires and nations come and go
gold and silver coinage from empires long turned to dust still retain a value based on their precious metal content, regardless of any additional value based on the rarity of the coin itself
food, on the other hand, from let's say, the period of the Persian empire, would be of no practical value to a hungry person, and no value at all outside of a curiosity factor, even if it still existed today
attempting to deny or discount the value of a precious metal based currency seeks to overturn or deny a 5,000+ year history of human civilization
Misanthropic, that brings us back around to my cocoa-currency. All silliness aside, what is the situation with currency value in the Middle East? I like the debate between Mig and jet because it has so many good contrast points. If the 110 dollars is not worth more on year two than the one hundred was on year one, in which economy is it less valuable? I don't undedrstand geo-economics at all. So here's my attempt at trying to figure this out:
In the scenerio that Mig laid out and jet responded to, a] who is the importer and who are they buying from, spending the 110 that is what 100 was a year before? Is it an English petroleum company selling to America and spending the one-ten in Asia? Is it at Arab country selling to Europe and buying in America - does anyone invest in America anymore? Anyone want to give a mini lecture on this - I'm sure the complexities of geo-economics can be boiled down into a couple of pithy lines, ha,ha.
An easy way to compare the price of oil and stock market indices against another commodity (say, gold) can be found here.
http://www.goldshekels.com/relative-valuations-of-stock-indices-and-comm...
Submitted by PleasantLifeStyle (not verified) on Sun Oct. 21, 2007 8:04 PM PDT.
Basing a currency on metal is not a bad idea, however it does have its down falls. If one day someone discovered a way to convert copper into gold (I know they have been trying for centuries and still no result, but it is a hypothetical argument), the the worth of Gold would immediately drop. Let alone there are metals that are more scarce then Gold.
However, Scott's idea of valuing a currency based on food would have been a great idea, if food is not replaceable. Can you imagine a currency that fluctuates based on its ability to grow wheat that particular year?
