Oil Prices – The “Whys” Behind the Rise

Posted on January 13, 2011

One very excellent theory is based on the fact that the dollar and the price of oil ARE connected.

Oil is priced in US dollars. As a result, when the US dollar gets weaker against other currencies, it becomes cheaper for oil to be purchased in other currencies. As a result, falling dollar values, which has been the nature of the dollar for awhile now, makes oil cheaper for the world to buy!And what happens when everybody is gobbling up oil? The price goes up. Investors like to hold hard assets in a potentially inflationary environment, and oil is one of those assets. In my opinion, this might be one of the best explanations for gas moving upward. [financialnut]

So, what are the “whys” behind the fall of the dollar.  Look homeward to our debt:

Its current-account deficit widened in Q3; its GDP growth is still quite sluggish; and unemployment is still close to 10%. Plus America has fiscal issues of its own. Some FX strategists think the dollar can only rally once the need for quantitative easing (an increase in the supply of dollars, after all) disappears. So the euro/dollar exchange rate will be determined by whose woes look like lasting the longest. In that case, a big payrolls number tomorrow might push investors to think again. America’s problems might then seem rather more tractable than Europe’s. [Economist]

But the most heinous reason the dollar is weak is an untenable policy:  to create jobs.

Washington is actively pursuing a weak dollar as a jobs policy. (The dollar just plunged to a six-month low against the euro.)

How? The Fed is keeping long-term interest rates so low global investors are heading elsewhere for high returns, which bids the dollar down. Every time another Fed official hints the Fed will start printing even more money (“quantitative easing” in Fed speak) the dollar takes another dive.

Meanwhile, Congress is ginning up legislation to allow the President to slap tariffs on Chinese imports because China is “artificially” keeping its currency low relative to the dollar.

But using a weak dollar to create American jobs is foolish, for two reasons.

First, no other country wants to lose jobs because its currency becomes too high relative to the dollar. So a weak dollar policy invites currency wars. Everyone loses.

At least a half dozen other countries are now actively pushing down the value of their currencies. Japan recently sold some $20 billion of yen in order to keep the yen down, the biggest ever sell-off in single day.

Last week, Brazil’s Finance Minister lashed out at the US, Japan and other rich nations for letting their currencies weaken to spur jobs. Brazil’s high interest rates are attracting global investors and pushing up the value of Brazil’s currency. This is crippling Brazil’s exports and fueling unemployment.

Here’s the other problem. Even if we succeed, a weak dollar makes us poorer. Imports are around 18 percent of the US economy, so a dropping dollar is exactly like an extra tax on 18 percent of what we buy. [readersupportednews.com]

So the next time an oil expert rounds up the usual “suspects” to explain rising oil prices (supply and demand, OPEC, the rise of India and China, etc.)  think again.  The new kid on the block, the weak US dollar, is as much to blame for this as any other cause.

But let’s not leave out an conspiracy theory SamHenry has dreamed up.  GM is government and China owned.  GM has just introduced the new green car Chevy vol.  They need to spur sales.  Oil will have to go well past $100 per barrel (roughly where it is as of 13 January) before a nation strapped for cash begin to put their credit ratings on the line and fork over for a Volt.  AND notice that that the auto industry is hiring again.  Oil and jobs.  Now there’s a relationship.