One reason why oil prices are spiralling

For some time, I’ve been struggling to understand why oil prices are rising so quickly. The increase in fuel costs and the price of goods and services is impacting everyone. I was getting frustrated, but this morning I finally found an answer that was staring me in the face all along.

Not being a trained economist, I tried at first to think about the rising price of oil in terms of the fundamentals of supply and demand. Was supply decreasing that much? Or was our demand increasing? This didn’t make any sense, as we witness the growth of a new environmental consciousness around the world.

Then I became suspicious of speculators. It didn’t seem to make any sense that on any given morning, news bulletins would spill out some new reason for a barrel of oil hitting new price records: “Tension in the Middle East over a possible conflict with Iran,” “Concerns over the security of Nigerian pipelines ,” “Hurricane fears in the Gulf of Mexico,” and so on. Is it possible that every day analysts need to find a new excuse for the rising price of fuel ?

Today, the Toronto Star newspaper provides a much more plausible reason: it’s the weakening U.S. dollar. It may not be the only reason, but it’s a very big factor.

The American dollar has been declining in value for six years. This has vastly undermined its role as the benchmark for foreign currencies. And since oil is bought and sold in U.S. dollars, Americans have to pay more for each barrel. Some analysts estimate that about $25 dollars of the price of a barrel is directly related to the weakening dollar.

Now, many oil-producing countries and central banks are shifting their securities towards the euro and Asian currencies. This further weakens the dollar. According to the Star, some experts fear the euro could someday replace the dollar as the primary reserve currency.

The state of the American economy has a lot to do with what is happening in world markets. Some would say Washington is paying for its recklessness. The war effort created a mountain of debt. The federal government has continued to borrow aggressively and spend aggressively. At the same time, U.S. consumers have also been spending and borrowing aggressively (especially on housing and cars), while personal savings have been almost nonexistent. The sub-prime mortgage fiasco is just one wave of bad news. Now, the risk of inflation looms on the horizon.

While we probably can’t blame rising oil prices entirely on American economic woes, we can certainly see the role the weaker U.S. dollar is playing. Let’s hope wise minds find an orderly transition to the next plateau. Stability would give everyone time to re-adjust to new global realities.

For more, see the Toronto Star article here.
Renewed calls to detach currencies from the dollar, as reported by the Jerusalem Post

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Thanks to Dawn Allynn for her photo of the oil rig, upper right. She made it available on the stock.xchang.