And interesting piece I found last week. More opinion that news, but it’s still very interesting.
“One of the things I think is very important to realize is that the growth in the world oil consumption is not that strong.” —David Kelly, chief market strategist, J.P. Morgan Funds; The Washington Post, May 4, 2008
“…There is substantial evidence that the large amount of speculation in the current market has significantly increased [oil] prices.” —U.S. Senate Staff Report, The Role of Market Speculation in Rising Oil and Gas Prices, June 27, 2006
The piece was written by Ed Wallace of Business Week. Worth reading if you have the time.
5 Responses to “The Reason for High Oil Prices”
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May 19th, 2008 at 8:42 am
Shockingly, this makes a great deal of sense.
May 20th, 2008 at 8:03 am
. . . always nice to be reminded where we schmoes fit into the big picture! ;-(
May 21st, 2008 at 7:57 am
However, another issue is that the price of oil in the worldwide market is expressed in US dollars. Let’s compare the currency of the US dollar and a hypothetical country’s (Zorbia’s) currency of clams.
If at a moment in time, 1 US dollar equaled 1 Zorbian clam, a barrel would cost the same for both countries. The US would purchase the barrel in their native currency, but Zorbia (in effect) would have to convert clams to dollars then purchase the barrel. Ok, even-steven.
A year later, the US dollar’s value falls by 10%; the Zorbian clam remains solid and unchanged. Then, 1 dollar would only be worth 90 clams. But, wait a minute, if the oil revenue is tied to the US dollar, and the US dollar has lost some of it’s value, it reduces the revenue expected by the oil producers. To compensate, they raise the price of oil (always in USD) to $1.10 to keep their revenue stream at its prior level.
Now, to the US, the price of oil has just been jacked up. But to Zorbia, it hasn’t changed at all because their 1 clam is now worth $1.10 on the exchange. Thus their cost of a barrel of oil remains the same!
While this is a very simple example, it demonstrates another (overlooked) dimension to the price of oil. Why is it ignored? Because it is too easy for government to blame the oil producers and speculators rather than include the effect of their own failed economic policies; the policies that have caused the value of the dollar to plummet.
Not too long ago (around the time the new MINI was introduced) 1 euro roughly equaled 1 USD. Check out that exchange rate now.
Bear in mind that I don’t deny that price hikes (beyond compensating for the devalued dollar) and speculation have also been partly responsible for the increased cost of oil, but an equal constituent force has been the fiscal policies in play during the last 8 years.
JM$0.02,
Theo
May 21st, 2008 at 8:00 am
Correction: the second sentence of the third paragraph should have read:
“Then, 1 dollar would only be worth 0.9 clams.”
My bad.
May 22nd, 2008 at 7:49 am
That’s a good point Theo. So while the price (in US$) of a barrel of oil has gone up, the value of said barrel hasn’t risen as much. That also helps explain why the cost of gas in Europe hasn’t fluctuated as much as it does Stateside.