A Short Tutorial on the High Price of Oil and the Falling Dollar

As the price of oil heads towards and exceeds $90 a barrel, news stories are replete with explanatory comments tying these new oil price highs to the deterioration in the value of the dollar. Nothing could suit the oil industry more than to have this red herring permit them to effect their well-rehearsed Alfred E. Neuman stance of "who me worry -- I had nothing to do with it." In any case, and as we have all learned, the high price of oil is a pure reflection of the market place, or so the oil industry and its vested allies would have us believe.

Let me run some numbers by you. On January 18 of this year the price of crude oil was quoted on the New York Mercantile Exchange at $49.90 per barrel. On Jan. 20 in his State of the Union address, President Bush vowed to double the size of the Strategic Petroleum Reserve from 750 million barrels to 1.5 billion barrels. Since then there has been no holding back the price of oil -- for this reason, and others having to do with oil industry posturing and restraint of available supply, prices continue to go through the roof in dollar and all other currency terms.

To continue. At mid-January with the price of oil shading $50 barrel, the value of the dollar versus the euro was 129.50 and the dollar index stood at 85.40.Today those exchange values are 143 and 77.50 respectively. In percentage terms that comes to a touch over 10 percent in each instance.

Now compare those changes to the extraordinary jump in the price of oil from January to October escalating from $49.90/bbl to over $90.00/bbl yesterday. This comes to an almost unprecedented jump of 80 percent in such a major industrial commodity over such a short period of time. Far and away leaving the comparable exchange rate differentials of other currencies versus the dollar in the dust. And you had better believe the oil boys will move heaven and earth if they can make the dollar the bogeyman for such a gargantuan move in oil prices thereby keeping the spotlight of scrutiny away from themselves. But more about that in future posts.

Comments

[kevinabt]

I'm sure that real decreases in supply, real increases in demand and perceived uncertainty about future supplies (ie Iran War) are all playing major roles in the price increase.

Manipulation by oil companies seems unlikely. The oil industry is already pumping the maximum they possibly can and selling it all immediately. The cost of oil (even though it is higher than it has ever been) is still reasonable. If you consider the ammount of energy contained within a barrel and compare that what it would cost you to do that work with some other energy source, you're still getting a bargain. Not everything is a conspiracy by big business.

[felixrandom]

if you want to triple the value of your proven reserves with out spending a dime just call up chenney and he'll start a war, make the planet very nervous, and as exxon (sign of the double cross) you're pulling in a billion a week in profit. of course every one else dies but they're just peasants.............

[mmckinl]

Steep decline in oil production brings risk of war and unrest, says new study

· Output peaked in 2006 and will fall 7% a year
· Decline in gas, coal and uranium also predicted

http://www.guardian.co.uk/oil/story/0,,2196435,00.html

[dadw5boys]

STOP BUYING STUFF WATCH THE PRICES FALL.

[dadw5boys]

NOTHING HAS ANY VALUE TILL SOMEONE PAYS FOR IT.
Leave it on the shelves and in the tanks and the prices will drop.
Just don't buy anything you can live without.
THEN WATCH PRICES DROP.

[yappnmutt]

i'm not going to get picky with a longer range view of the present but will comment that the last 20 dollars in a little over a month coincides with the devaluation of the dollar(looking to the future) and the saber rattling stopping just a hare's breath from nuking iran; both have real effects on oil prices. my info agrees with to the extent that traders are certainly responsible for a significant runup in prices but their reasons may be tied to supply issues caused by a new collusion between producers and consumers. market volatility is generally not liked by any market participant which by itself is enough incentive to smooth prices out. iran, russia and venezuela are on record saying they would be perfectly happy selling their oil at a set price. europe, japan and china have taken advantage of the opportunity by negociating long term term contracts with fixed prices. the producer gains by knowing how much revenue they can expect from x amount of barrels. the buyer advantage is a fixed instead of variable cost on their books and negates the need for hedge fund trading to smooth the energy costs. with less oil on the spot market the price would naturally go up due to supply constraints. who benefits from the open market price system? the trading exchanges and traders are obvious but so do the huge oil and gasoline wholesalers like exxonmobil and valero. the premium these companies gain from traders gone crazy and all the other intangible human variables that affect a market detached from the usual principles of economics is worth going to war for.....literally.

[larry278]

Thank you, your blog is as well written and informative as a Wikipedia entry.

[mmckinl]

Filling the SPR : .12% of world supply per day

"To that end, and assuming similar market conditions, I would expect the Department to begin purchasing crude oil in the Spring at a rate of about 100,000 barrels per day. After a few months, we will reassess the market before continuing the fill using royalty in kind payments through the end of the year. In 2008 and beyond, as we work our way to 1.5 billion barrels, the Department will determine future fill rates based on information and market conditions available at that time."

Filling the SPR will take 10 to 20 years , unless the price of crude plummets and purchases ramp up.

I cannot see how this .125 % of world oil supply could possibly send oil up 60% ...

I think there are a number of factors including:

-fall of the dollar
-hedge against the dollar
-increased demand
-increased political uncertainty
-Bush and oil company shenanigans

-but aggravating it all, Peak Oil :supply stagnation and decline

[Boyarina]

It's "what, me worry?" and not "who, me worry?". This said, the reasons for attacking Iraq and threatening Iran are largely because Saddam switched from the dollar to the euro for payment of Iraqi oil, and Iran has recently done the same thing with their oil bourse.

[worldtraveller]

Get a Smart car, get a Prius, Bike or walk to work or stop complaining. You can be part of the problem or part of the solution. If you are in the first group. No WHINING allowed.

[InternationalObserver]

It's comments like this that make me .... think less favourably of the 'Greenies'. The issue is not 'what does it cost me to fill up?" (hence your solution: 'buy a car with better mileage') but how is the market being manipulated? If we (consumers) allow the market to be manipulated then capitalism will eventually collapse. And then what? Feudalism? Anarchy?
As Learsy is suggesting, the oil market is manipulated so that unfair profits can be generated. And the Govt is doing nothing to stop. Maybe voters should ask who the Govt is working for ...

[worldtraveller]

1- You need to read my other postings about market manipulation in this thread

2- My point is, in many places, that with the exception of trading improprieties on exchanges, we have absolutely no control over oil prices. We have no control over the countries that control the reserves. Even a significant reduction in demand can easily be met with a reduction in supply thus keeping prices where they are. Really the only solution is to use less or seek sources that allow self reliability. Am I misunderstanding you? BTW..tough loss for you guys to France..

[unitron]

And of course the continuing chaos in Iraq helps keep less Iraqi petroleum available to the market (even stolen, smuggled Iraqi petroleum gong to the black market), and that helps keep supply down and price per barrel up.

[seawolf77]

Hey anybody know the difference between us invading Iraq and Iraq invading Kuwait. Give up. There's nobody big enough to throw us out.

[FearlessFreep]

Just like there was nobody big enough to throw the Americans out of Vietnam...

[FatherWolf]

Ummm ... the Viet Cong?

[kingcityguru]

Didn't Jimmy Carter solve this problem. Oh yah, paying up to get gasoline is better than having no gasoline to get.

It is all supply and demand people.

[DICKERSON3870]

No it is not ALL supply and demand! That's absurd. What about OPEC?

[Opus007]

Oh the poor oil companies- first it was Katrina, then scheduled maintainence on the refineries, and of course any bad day in Iraq shoots prices up. Basically Republican fear mongering and an oil man in the White House are the dynamic combination for the obscene rise in oil company profits. Why don't we make Big Oil pay for the Iraq war since it benefits them so greatly. It's Enron all over again.
We have had no significant hurricanes to upset production,very warm tempertures and shouldn't the easily spooked marketplace have adapted to bad news in Iraq as we approach the 5th year! The price of heating oil is outrageous. What a scam!

[fourex]

The rock and a hard place will meet very soon if the Fed lowers again in October. Look for the dollar to reach 50 year lows. Wait you been told not to look.