Weak Dollar’s Affect on Oil Prices
Does the Frail American Currency Influence World Petroleum Value?
Increasing gas and oil prices in the USA may be signaling an economic recession; however, is this rise truly a world problem or unique to America and the US dollar?
Is the cost associated with increased oil prices a world problem or unique to American policy and the weak dollar? Recent days have seen American politics shift from war and security to the declining American economy and nowhere has the weakening been more evident for Americans than the price they pay at the pump.
Oil Pricing
World hydrocarbon sales have been priced in US dollars since 1971 when Richard Nixon “closed the gold window.” From The Commanding Heights by Daniel Yergin and Joseph Stanislaw, “…on August 13-15, 1971… came the New Economic Policy….The gold window was to be closed….”
Dr. Ron Paul extrapolated on the affect of the “new policy” when he said before the US House of Representatives on February 15, 2006: “Amazingly, a new [monetary] system was devised….elite money managers, with…support from U.S. authorities, struck an agreement with OPEC* to price oil in U.S. dollars exclusively for all worldwide transactions.”
Commodity Exchange
Paul continued in his statement: “This gave the dollar a special place among world currencies and in essence ‘backed’ the dollar with oil.” The US dollar was rescued until recent years. The very factors that led to high oil prices in 1979 are back. “It’s like deja vu all over again” – Yogi.
- Gold: Lars Lingren of Gold Price News: “…points out that we are seeing the same double break of a well defined trend channel as we had in August 1979.” Gold peaked at $850 an ounce in 1979 and closed on February 1 2008 at $923. According to Kitko’s gold price charts, gold remained stable at $100-$200 an oz. from 1975-1979. It remained stable at $300-$400 from 2000-2006. Over a 5 month period it rose to $800+ in 1979 and so far over the last 2 months it has risen to $900+
- Oil: NPR reports in their Gas & Oil Prices - A Chronology report that on 8/23/2000: "...crude oil for October delievery closes at $32.02...." According to J. W. Anderson’s paper The Surge in Oil Prices: Anatomy of a Non-Crisis; “The peak, in today's dollars, for crude oil was $67 a barrel in 1980….”A Reuters' poll, reported in Arabian Business on January 2008: “The WTI price, which averaged $72 per barrel in 2007….” shows a 7% increase in the price of crude from 1980 to 2008.
Currency Values
- The Euro vs. US dollar exchange rate has grown from 1 Euro to $0.85 in mid 2000 to 1€ to $1.485 USD on February 1, 2008 – a 63% drop of the dollar.
- Based upon the Board of Governors of the Federal Reserve System (Series ID: EXUSUK,) the US dollar dropped from 1.63 GBP in 10/1976 to 2.42 by 10/1980 – a 33% $ decrease. Also from 12/2001 to 12/2007 the British Pound grew from 1.44 to 2.02 US dollars – a 29% $ decrease.
- The Board of Governors also show (Series ID: DEXJPUS,) the US dollar dropped from 244 Japanese Yen to 201 Yen over a 4 month period in 1979-1980 – an 18% $ decrease. From 2001 to 2007 the Yen dropped from 126 to 104 – a 17% $ decrease.)
America’s Problem
The data shows that as oil prices go up (verses the dollar) the price of gold also increases and the dollar drops (relative to other currencies.) In Ben Steverman’s September 2007 Business Week article, he quotes Paul Larson, equities strategist at Morningstar as saying: "It's no coincidence that the U.S. dollar is hitting new lows just as oil prices hit new highs.”
But as oil increases in dollars, nations receive more dollars for their currency. Crude oil prices have increased 7% from 1980 to 2008 (in today’s dollars) while the Yen has increased 17%, the GBP 29% and the € 63%**. This implies the real oil price increases are greatest in the USA.
* Organization of the Petroleum Exporting Countries
** The Euro started in 1999.
