Rising Oil Prices and the Falling Dollar...

Oil prices recently hit an all time high of over $92 per barrel. [1 barrel = 44 gallons] In January of 1999, oil was merely $11/barrel. Worries about oil stockpile inventories, the unrest in the Middle East, the increased demand (especially in China and India), and the weakening of the U.S. dollar all contributed to this steep rise in oil prices. Many analysts even think that it's just a matter of time before oil hits $100.

Reports by the Energy Department, the International Energy Agency and OPEC (the Organization of Petroleum Exporting Countries) in recent weeks have shown that oil supplies are falling as demand is growing. Turmoil in the Middle East also has many worried that the price of oil could spike up. Turkey is currently threatening to send troops into northern Iraq unless the Kurdish rebels retreat. Traders worry that this will disrupt the flow of Iraq's oil exports, driving up the price of oil.

However, the key reason for high oil prices in the United States can be attributed to the deflation of our currency. In early 2001, a barrel of oil cost ~$30 USD. In Europe, the cost was $32 Euros. The devaluation of the dollar is noteworthy because the exchange rate used to be $0.93 USD to buy a Euro. Today, the exchange rate sits at $1.44 for one Euro. This is why we are paying over $90 USD while people in Europe only paying $63 Euros per barrel. In the six years, the price of oil has tripled for Americans whereas it has barely doubled for Europeans. The falling dollar justifies the higher prices because OPEC sells oil in US dollars but they often buy goods in Euros.

The same concept goes for other commodities such as gold, silver, copper, natural gas, etc. The weak dollar means that our purchasing power is decreased relative to the rest of the world. The impact of the devaluation of the dollar is very significant if you look at it from a global-macroeconomics perspective.

just something to think about..

-ben