19 October 2007

Why Are We Paying $89 A Barrel for Earl? It's Not What You Think

Oil hit a new high yesterday, $89 a barrel. Some analysts predict it will soon hit $100. Hooray! All this has caused much anxiety in the markets and handwringing in the press, which has generally attributed the increase to 1) unrest in the Middle East 2) increased demand, particularly from China and India and 3) speculators.

OK, so all of these things are a factor to some extent. But what analysts and pundits generally fail to point out is another reason for high oil prices in the U.S. market is the devaluation of the dollar. If it weren't for that, oil would cost about $60 a barrel, as it does effectively does in Europe and Canada. On George W. Bush's inauguration day in January 2001, you could have purchased a barrel of oil for about $30. If you lived in Europe, a barrel would have set you back about 32 Euro. Because the value of the U.S. Dollar has fallen so substantially since then (it took 93 cents to buy a Euro in January 2001, it now takes $1.42), the increase in the cost of oil for a U.S. consumer has far outstripped the increase for a Euro (or Canadian, or Swiss, or just about any other) consumer.

Today, it takes US $89 to buy a barrel of oil, but only 62 Euro. Going from 32 Euro to 62 is a healthy rise, but is less than a 10% annual increase since Bush has been in office. By contrast, the move from $30 to $89 is nearly a tripling, or more than 17% per year.

Thus, of the $59 increase in the cost of a barrel of oil to a U.S. consumer, more than $30 is due to the depreciation of the U.S. Dollar and the fiscal and trade policies that have contributed to it. Not Middle East tensions, not China's increased appetite, etc. Same thing is true with skyrocketing price of gold; gold is going through the roof, sure, but what's really happening is that the dollar is going through the floor.

Many things have led to the devaluation of the U.S. Dollar. But a big portion of it can be attributed to a growing deficit that is largely attributable to 1) runaway spending on a disastrous war with no end in sight—in fact the chart shows how the divergence between currencies really starts to pick up following the invasion—and 2) massive tax cuts to the wealthy.

And that ain't good.

1 comment:

Anonymous said...

Very smart observations here, you're right-- this shocking, painful jump in oil prices has been a pain chiefly for Americans due to the dollar drop, not for Europeans.

It's interesting, I've been seeing a lot of my old colleagues and co-workers in the USA or Australia-- especially the smartest, best-educated professionals-- packing up, learning a European language (esp. German or occasionally French) and migrating to the Eurozone, permanently, living there, raising their children there.

It makes sense why-- in the USA and also places like Australia and Canada (which are following the US lead in many respects, on their economic policies), they're working grueling hours for diminishing salaries as outsourcing cuts their compensation, *and* now they're forced to deal with the inflation that inevitably comes with a plummeting currency. Very hard to raise families, very hard to start businesses, very hard to get their kids educated as US intrastructure and schools also crumble.

Whereas in most European countries esp. places like Germany, Austria, France, Belgium and the Netherlands, they can work more productive but still reasonable hours, have time to start their businesses, get their kids educated in top schools even at the university level for low cost, and most of all draw a salary and save it in Euros, an automatic turbo boost to their earning power.

(The UK isn't an option, its banks are having runs, its debt is in the stratosphere and it's also mired in Iraq.)

So German's probably the best language to know now, especially for any kind of techie in electronics, physics, chemistry, engineering, metallurgy or the trades. The best literature is again being published in it, even within American tech companies, those with some German knowledge now have an edge. Of course it's also a big boost to a work permit request for somebody e.g., working in Hamburg.

For my part, I just love having another excuse to learn French or Italian. I'm half-Italian and wondering if I could use that to help get some nice flat in Milan. Nice to have a plan in mind.