Wednesday, April 16, 2008

The Falling Dollar Meter

Everyone who drives a car knows that the price of fuel is rising almost daily. One of the most securely held jobs in America right now is the task of changing the numbers on the gas station's price sign with a long pole and suction cups.

Now many of y'all might be led to believe that these rising prices are nothing more than a greedy cash grab orchestrated by those thieving monsters collectively known as Big Oil. The U.S. government has a vested interest in perpetrating this view, which helps explain why Congress summoned the CEO's of this supposed cartel to Capitol Hill, a few weeks back, for a dog and pony show in front of the news cameras. Unfortunately for the poobahs in DC these particular witnesses were not nearly as much fun to grill as a steroid using baseball player, because their answers indicated that the problem was much more closely tied to policies emanating from Washington than in the boardrooms of Houston or New York.

Chevron CEO Robert Peterson is grilled for the cameras.

The truth of the matter is that the price of oil is directly tied to the plummeting value of the U.S. dollar and the precipitous descent of the greenback is mainly due to the unrestrained printing of dollars by the U.S. government to help fund a failed war and to paper over disastrous central banking policies that have led to the current crisis in the financial system.

The world price of oil is currently pegged to the U.S. dollar and thus as it continues its downward spiral on world currency markets the corresponding amount of them it takes to purchase a barrel of oil is continuously on the rise. In fact you can use your local gasoline station's price sign as a very accurate and up to the minute gauge of the health of the U.S. dollar. After all there is no shortage of gasoline when you go to fill up your tank, so these higher prices are not part of the cycle of supply and demand, but are a direct reflection of the dollar's decline as a traded currency. Plain and simple. Econ. 101.

This morning's reading from my local U.S. dollar value meter on Hwy. 192

In today's headlines I find that the American Geological Institute has come up with empirical evidence to demonstrate the cause and effect of a falling dollar and rising oil prices:

"The steep increase in the price of crude oil in the United States remains a headline issue, along with the falling US dollar. The drop in the dollar has caused concern in oil-producing countries which use it as the economic basis for the commodity, and often their currency. The chart below shows the spot market price of crude oil per barrel (BBL) in US dollars and in euros from 2001 to today. The price of oil has grown faster relative to the dollar than to the euro. Yet, a portion of the rise in oil prices is due to the fall of the value of the dollar. The graph also shows the number of barrels of crude oil per cost of an ounce of gold, demonstrating the parallel growth in commodity pricing.

If the US dollar had remained strong in the global economy, oil might, in theory, be around $65 per barrel. However, oil is priced in dollars, and oil prices continue to rise. The impact of increased oil prices can not be ignored in the US economy, and, in turn, can further weaken the dollar. Resource economics is a complex feedback loop where today’s resource boom is driven by many external factors."

The chart shows the price of a barrel of oil per dollar in blue, euro in red and ounce of gold in purple.

A cursory glance at the graph will show you that by using gold as a standard currency of value the price of oil has not risen appreciably since 2001. Now go figure!

Leave it to geologists to set us straight on what is going on beneath the surface of popular conception and dig down beneath the sedimentary layers of fiscal mismanagement. Keep your eyes on the falling dollar as you drive past your local gas station. The guy changing the numbers on the sign is doing the public a valuable service if only it knew how to interpret the data.


mr. chowder said...

i'll print and post on the fridge at work. should get the alaskans giddy over their promised "record" permanent fund dividend check of this fall to thinkin' more about my advice to save the thing for toilet paper. post is excellent ammo for troublemakin'. grottsi.

Frank said...

I've been thinkin the very same thing every time I go by a gas station. That and the abiogenic petroleum origin theory. Oh, and I think about how the ounce of silver I bought in the mid-90s for 5 bucks is now suddenly worth about $20, but the amount of silver in the world has remained constant. That means the twenty in my wallet is worth only 20% of what it was worth a decade ago. That really sucks.

beamis said...

You better spend it while you can!