Monday, June 16, 2008

The Oil or US Dollar Predicament


This morning a barrel of oil traded near $140. Traders and analysts have stated that the continued weakness of the US dollar is the primary reason for the continued increase in the price of oil. That may be the case, but the high price for a barrel of oil has caught the attention of Saudi Arabia. The Saudis are concerned about this not because the high price has put a strain on the world’s economy and the price of food production as well, but because if the price of oil stays high, the Saudis believe that alternative sources of energy will be pursued.

We, the United States, should have had a Manhattan Type Project going right after the first oil embargo in 1973. But, why didn’t we? That, my friends and fellow Americans is the billion dollar question. Actually, it is the several billions of dollar question. In previous writings, I have mentioned that it is my opinion, after doing a little reading over the last 40 some years, that the recycled petrodollars that runs Washington, D. C is the major reason no Manhattan Type Project has been pursued. I still hold that view and by a process of logic, anyone with an average brain and a little curiosity, would come to that same conclusion.

What can the United States do about the falling dollar? Well, if we had a balanced trade policy, meaning that if we exported an amount in US dollars roughly equal to the US dollars we spend on imports, we could buy up some of our currency on the open market. But, that option is out for us now because we are not anywhere near a balance with our import/exports. In the language of the traders, doing such a thing is like "trying to catch a falling knife." It is not a very good idea. So, since we can not buy dollars on the open market, we need to look at another avenue to pursue.

What about drilling and pumping for more oil in and around the United States? Perhaps, if the rest of the world saw that we were serious about solving our energy problem spelled oil, we would see the dollar stop falling. Everyone in the world now knows that investors around the world are buying commodities, such as oil, as a hedge against a falling US dollar.

Why do investors around the world think the US dollar is going to continue to fall in value? I can answer that question in two words, monetize debt. The United States government in cooperation with the Federal Reserve Bank monetizes the debt of the US Government. In other words, our government, besides running a trade deficit and a budget deficit, is also expanding the money supply at a rate that is making our Federal Reserve Notes worth less and less when we go out and buy things like gas. If you put your money in a bank and you are not earning any interest on your deposit, you are losing money. How are you losing money if you are not spending it? Take the price of a gallon of gas and chart the increase in price over the last 18 months, and then figure how many fewer gallons of gas you can buy now than you could buy 18 months ago for the same $100 bill. Now, perhaps everyone can understand what is happening to those Federal Reserve Notes we get when we go to the bank for some cash.

This is not rocket science or brain surgery. This is just plain economics, and very basic economics at that. Too much money chasing a limited supply of a commodity, any commodity in demand will do, and the price of the commodity must go up. Unless there are price controls or rationing of gasoline, the price must go up. The cost of the raw material from which gasoline is made has gone up and continues to go up. That is why investors are continuing to buy oil as a hedge against a US dollar declining in purchasing power.

If as many people were interested in their money, trade and budget deficits, monetary policy as it is practiced in the United States, as watched American Idol every week, the US government would be forced to live within its means. People would riot if they understood what was happening to their money. I guess we are all lucky that is not the case. Ignorance is bliss.

In a chess match, this is where the opponent says “check”, as in “check mate”, only it isn’t “check mate” yet. We still have time to work our way out of this predicament. I just wish someone would say or do something that would indicate that there is a light on somewhere among our leaders. Stay Tuned.

4 comments:

Unknown said...

The check on all of this may be coming from an unexpected source. Silicon Valley. Where, even as we speak, there is a small 'prerevenue' company that has figured out how to make 'bugs' chew on biomass like wood chips and other inedible stuff and turn it into an effluent that looks, acts and feels like crude. And projections say it can be done for $50.00 a barrel. Nerds strike again.

The company is LS9 and the article describing all of this is here.

moneythoughts said...

New domestic sources of energy, regardless of what they are, will help reduce the amount of oil we import. New ideas are great longer term solutions. This economy needs relief now. The weak dollar will continue until investors around the world see a reason to stop selling their stash of US dollars.

Vikki North said...

Hey Lou,
Is LS9 a publically traded company?
Thanks for info...he, he, he.

Hi Fred,
(Yes-I know how greedy I am.)So what do you think of our two candidates in regards to this issue? Do you feel either may be that 'light' to start policies to help us.
Vikki

moneythoughts said...

My purpose in writing this blog is not to be political or pick candidates for President. There are plenty of TV people doing that already. I am trying to bring up some economic topics that may give people something to think about.

Personally, I believe the majority of Americans would like to see the United States more energy independent. Developing more domestic oil production may not change the price of oil much, but it would improve our trade deficit. Especially if we produced enough oil to meet all our domestic needs and exported the rest. Importing so much from China, to my mind, is not healthy economically. We need to retain certain skills and domestic production for issues of national security.

Since we have a representative democracy, and not a pure democracy, where everyone votes on all issues, money plays a role in our political process. I doubt that the money can be taken out of the process, but I do believe through educating the electorate, lobbyist dollars can be kept in check. That is why I am writing this blog, not to pick candidates.