$118 a Barrel and Climbing

Today the price of oil has been quoted at over $118 a barrel, and the oil analysts are saying that the price will go higher. Some of the increase in price is because of the increase in demand and the other part of the increase is because of the problems arising with the supply. The third aspect of the increase, for us in the United States, involves the decline in the value of the US dollar in the foreign exchange markets. (For an explanation of the decline in the US dollar, see the posting titled Money Money Money Money, dated 4/21.

Several years ago I read in The Wall Street Journal an article about the future demand for oil. In the article, they sighted that when China gets to where they are using as much oil per capita as Mexico, that there would be a crisis in the demand for oil around the world. Today it is common to read about the demand for oil in both China and India. But, they are only two countries. While large in populations and growing their economies at faster rates than the more developed economies of the west, the demand for oil has continued to grow around the world. In the Middle East, new emerging countries with new wealth from oil are expanding their economies as well and using ever more oil to build their infrastructures. So, it is simplistic to lay the problem at the door step of our Asian neighbors. Russia, hardly a small country, is also using more oil in its development since the collapse of the Soviet Union. So I ask, where was the CIA’s intelligence gathering mechanism when it came to scouting out the future demand for oil? Did the best and the brightest miss this global shift in the demand for oil as well? Is not oil of strategic importance? Does not jet fuel, tank fuel and truck fuel come from oil? Or, were we planning to reduce our demand for oil here in the United States? I doubt seriously that anyone would have made such a case in 1973, especially since the Cold War with the Soviet Union was still in force. Then, what is the explanation for this Super Power, the United States of America, missing the future demand for oil so badly and not making contingency plans for our future? Is it some great conspiracy concocted by the oil men in Texas and their political friends in Washington? Or, are we just not as smart and forward thinking as we think we are? The growing demand for oil around the world may be an item that we have little if any control of, but certainly we should have foreseen this coming and increased our supply of oil domestically.

The supply of oil has been effected by a number of events taking place in oil producing countries around the world. From Iraq to Mexico to Nigeria and back to the Middle East, oil production for one reason or another has been interrupted because of fighting or other political considerations. OPEC watches the situation and for now is sitting on its hands and taking no action to increase production. So much for helping Kuwait rid itself of the Iraqi army in the Gulf War of the early 1990’s. And, how much did we spend keeping troops in Saudi Arabia after the Gulf War to protect the Saudi oil fields? It is my opinion that we, the United States government, does not use our resources effectively. We spend a lot of money around the globe and have very little to show for it. Now with the “war” in Iraq, we are spending $12 billion a month. To make matters worse economically, we are borrowing money to pay for this “war”.

That brings us the the third factor that has caused the steep price increase in the price of oil for those of us living in the United States. The fact that oil is priced in dollars around the world does not mean that the price of oil has to go up in dollars as dramatically as it has. What this means is that the traders that buy and sell oil, quote their prices for the bid and asked side of the market for the commodity oil, do it in US dollars. What has made the situation worse for all consumers in the United States is the fact that the value of the dollar has fallen in relationship to other major world currencies. If the dollar had held up in value, there would most likely have been some increase in the price of oil and thus the price of gasoline and diesel, but the increase would not have been as great had the dollar maintained its value. What lead to the decline in the value of the US dollar? Borrowing by the US Treasury to pay for things that the government did not have money to pay for. That along with all the items imported from around the world placed us in the position we now find ourselves today economically. Do not blame the politicians because we elect them, and they are our proxies for the policies that are crafted in Washington. That’s how a democracy works. The only problem that I see is that in the present world, some knowledge of economics is essential for our representatives to keep us out of trouble. Unfortunately, knowledge concerning monetary theory and how our fiscal policies inter acts with the world's economy, is itself a rare commodity. Stay tuned.