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Why is oil so high? The American Economy's dirty little secret
I'm no economics expert, far from it, but I read recently that the entire rise in oil prices tracked the fall of the American dollar vs the Euro.
But why would that matter, I asked, since oil is still traded in American dollars?
Well, if the price of gas tracks the American dollar, then WE pay more at the pump, while all other countries based on the Euro, pay relatively little more in Euros (or local currency based off the Euro exchange rate) at the pump that they did before the dollar's fall and the subsequent price rise of oil vs the US dollar.
So, for a given exchange rate of US dollars and Euros:
US Euro barrel of oil US barrel of oil Euro1.00 1.00 $139 $1391.00 1.10 $139 $1261.00 1.20 $139 $1151.00 1.30 $139 $1071.00 1.40 $139 $99.31.00 1.50 $139 $93
So, if my math and interpretaton is correct, at today's price of oil of $139 and today's exchange rate of 1.55 euros per dollar, people on a Eruo economy are paying less than $90 Euros per barrel.
Which could explain why much of the rest of the world isn't screaming as loudly as we are: for them, the price of oil hasn't risen much compared to what we pay. Their price will have been relatively steady while ours has been shooting through the roof.
But why would that matter, I asked, since oil is still traded in American dollars?
Well, if the price of gas tracks the American dollar, then WE pay more at the pump, while all other countries based on the Euro, pay relatively little more in Euros (or local currency based off the Euro exchange rate) at the pump that they did before the dollar's fall and the subsequent price rise of oil vs the US dollar.
So, for a given exchange rate of US dollars and Euros:
US Euro barrel of oil US barrel of oil Euro1.00 1.00 $139 $1391.00 1.10 $139 $1261.00 1.20 $139 $1151.00 1.30 $139 $1071.00 1.40 $139 $99.31.00 1.50 $139 $93
So, if my math and interpretaton is correct, at today's price of oil of $139 and today's exchange rate of 1.55 euros per dollar, people on a Eruo economy are paying less than $90 Euros per barrel.
Which could explain why much of the rest of the world isn't screaming as loudly as we are: for them, the price of oil hasn't risen much compared to what we pay. Their price will have been relatively steady while ours has been shooting through the roof.
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Love the sophisticated formatting of TPM html. Bottom line, we are currently paying in US dollars, 1.55 x what Europeans are paying in Euros and the fact that oil is purchased in US dollars worldwide is killing us. Of course, while the dollar was strong, it was our advantage to have a US$-based oil exchange. Some have suggested that the rumored decision by Saddam to start basing Iraq oil off of the Euro is what prompted the desperately fast action by the Bush Admin to invade Iraq, but perhaps not.
June 6, 2008 5:24 PM | Reply | Permalink
Oil prices are going up for everyone. Yes, for those paying Euros, it's not as bad. But make no mistake, the prices are rising everywhere.
June 6, 2008 5:31 PM | Reply | Permalink
I hope you won't mind me saying this but one of that things that people outside America bemoan about it is the one-sided flow of information which leads to a, dare I say it, relative insularity. The rest of the world knows what's going on in America in a way that isn't reciprocal - which is one of the key reasons I think that the neocons could get away with what they did.
Europeans pay FAR more for petrol than Americans could wrap their minds around. (As do Australians.) The reason for that is that they're/we're taxed so much more. The reason for that taxing level is that governments around the world are trying to get people away from its consumption: they spend a fortune on public transport for example.
It's sad that Lawson actually believes that Europeans aren't screaming... there are riots all over Europe at the moment!
BTW just as a side note, at the moment I'm paying
Aus$1.65 a LITRE. That's US $1.58. That's roughly a quarter of a gallon.
ie I'm paying US6.32 a gallon.
(And just as a sidenote, having lived in America, I can say that our standard of living here is pretty comparable. We're not the poor cousins as it were because of the cost of fuel. And nor does our tax rate feel punitive in spite of the fact that it guarantees us that, if we get sick, it doesn't inevitably lead to bankruptcy. )
June 7, 2008 1:31 AM | Reply | Permalink
Could be but the rise in oil prices has been on a tear for a number of years now. I think its WSJ propaganda to tell us that there isn't any collusion going on between big oil and opec. Certainly there is. There is no lack of oil. There is no lack of gasoline. there is no lack of NG. Its the only commodity that has gone up in price even when it isn't scare.
Call me clyde conspiracy but if one does direct graph between GWB being president and the price of oil...something tells me there is going to be a gusher.
The price of Oil is being directly maniuplated on the trading floors of the commodity markets now. There are many reasons for it but the value of the dollar and the amount of oil being pumped aren't two of them.
June 6, 2008 5:32 PM | Reply | Permalink
The price of gas in the UK is the highest it has ever been. The price has risen 46% in the last 20 years. HOWEVER, I'm willing to bet that the current runnup in prices in the US over the past few years is mostly due to the weak dollar rather than the price of oil as seen from a more stable currency.
Track the price of oil vs the us dollar after 9/11. Interesting correlations.
June 6, 2008 6:23 PM | Reply | Permalink
When I arrived in California at the end of Clinton's second term, a gallon of gas was about $1.10. Kind of a far cry from today's prices...
June 6, 2008 6:28 PM | Reply | Permalink
Track gas prices in "real" dollars from 1979. Adjusted for inflation, gas prices didn't take a huge jump until after 9/11.
http://www.randomuseless.info/gasprice/gasprice.html
If you look at the last big movement in the past year, it tracks quite nicely the exchange rate for the US vs the Euro. It's the economy of the US that has caused this huge jump in oil prices. The Saudi gov told Bush they weren't getting that much of a complaint from the rest of their customers, and probably he was told the truth. If the US dollar was stronger as measured by US$ exchange rates, we'd be paying as much as 30% less at the pump, I think.
June 6, 2008 6:47 PM | Reply | Permalink
Actually, I looked at the numbers again, the latest run up apparently has nothing to do with the exchange rate. (not just the $100, the past 6+ months). Something is very dogey though. Perhaps it all is just speculation on oils futures as some have said, but why has this never bitten us this hard before, I wonder? Some trifecta at work, no doubt. (quadfecta? quinfecta? Random Factors Have Aligned?)
June 6, 2008 11:19 PM | Reply | Permalink
The value of the dollar has a lot to do with it. We would be in better shape if rates were not lowered below 4-5% last year.
If the Fed would raise rates even 1/2%, to 2 1/2%, oil would drop, but the Fed cannot raise rates because out Bush economy is going down the tubes.
Holders of dollars know the US is in debt up to it's ears, and they fear inflation, so they invest in commodities which investors believe represent more value than pieces of paper with dead presidents pictures.
June 6, 2008 11:40 PM | Reply | Permalink
Another factor in rising oil prices is that large hedge funds in the US are stockpiling oil futures using a loophole that (of course) the Bush administration allows (by law they aren't supposed to be able to purchase and hold oil). These hedge funds are having a significant effect on the price.
Bush's religion is the free market, no matter how much harm is done to the economy or to the average American. Moneyed interests love Bush and his religion because they are given free rein to profiteer. Our government has been taken over by profiteers. It's more subtle here than in Russian, but it amounts to the same travesty.
June 6, 2008 5:38 PM | Reply | Permalink
But, but, but, Dubya looked Putin in the eye and saw --> HIMSELF (except that Putin is smart and can read and actually speak!)
In other words, an evil idiot meets an evil genius -- and likes him -- and the world is the worse for it!
June 6, 2008 6:50 PM | Reply | Permalink
No one will like this, but the Europeans have another secret weapon... Genuine carbon tax... The price of a liter of gas would be considered astronomical in the US...
http://money.cnn.com/pf/features/lists/global_gasprices/
Our error is in letting the oil companies make the money.
June 6, 2008 5:43 PM | Reply | Permalink
I think a lot of us like the idea of a genuine carbon tax plenty! It just failed in Congress for the year, but it will pass next year, when Congress has about 4 Republicans left, and Obama rules from the White House.
June 6, 2008 6:20 PM | Reply | Permalink
Perhaps you haven't been following the news out of Europe closely enough:
http://www.cbc.ca/world/story/2008/05/30/fuel-protests.html
They're practically rioting over there.
June 6, 2008 8:30 PM | Reply | Permalink
I knew I couldn't trust that baby...It speaks and reads Canadian :)
June 6, 2008 11:03 PM | Reply | Permalink