“Then, 1 dollar would only be worth 0.9 clams.”

My bad.

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