Esoteric Dissertations from a One-Track Mind

October 19, 2007

Mother Jones: Why Are We Paying $89 A Barrel for Oil?

Filed under: economy, politics — Tags: — codesmithy @ 9:54 am

The Mother Jones blog examines why Americans are paying $89 for a barrel of oil. Common reasons given for this rise are:

  1. Unrest in the Middle East
  2. Increased demand, particularly from China and India
  3. Speculators

No one is going to deny those factors play a role in increasing oil prices. The question is: how much? Well, one way you could find out is by looking at prices of oil relative to other currencies over some period in time. Mother Jones took the Euro as an example. What it found was that $30 of the $59 rise in oil prices can be attributed to depreciation of the U.S. Dollar. This observation is confirmed by viewing the prices of other commodities such as the skyrocketing price of gold.

Watching people debate this on digg is depressing. People go off on “gold” standard rants. Forgetting the uncontrollable deflationary or inflationary pressures tying a currency to an arbitrary commodity brings, which is one of the reasons to prefer fiat dollars. Their argument usually goes as deep as supposed distrust for the government and faith in markets. I don’t really feel like going down the rabbit hole arguing with those people because no matter how much evidence is presented they’ll keep bleating the same talking points. (Although, I would like to get a summary of their opinions on what role monetary policy played in the 1929 depression, anything to make them actually think.)

Some of the reasons for this inflation can be found in Bill Moyer’s Journal with William Donaldson and Robert Kuttner. The headline on Crooks and Liars is a little sensationalist because the answer to whether we are headed for a crash like 1929 is no. Fiat dollars, in particular, have an ability to soften the blows the uneven markets bring. However, such methods are not free as William Donaldson points out.

BILL MOYERS: Are we courting a repeat of ’29?

WILLIAM DONALDSON: Well, I think that’s a little strong. Again, I think that the Federal Reserve, the Central Bank, has an ability to reverse a downturn, but at great cost. I mean, we haven’t mentioned the where the dollar is overseas. We haven’t mentioned–

BILL MOYERS: We can’t see it.

WILLIAM DONALDSON: Well it’s disappearing.

BILL MOYERS: Through the floor.

WILLIAM DONALDSON: So I think that the central banks have a greater technique and ability to meet this problem. But insofar as they do– we run into a moral hazard, i.e. we bail out the people who made bad or devious, or whatever you wanna call ’em, investment decisions. So you sort of are saying, “Go ahead and do whatever you want, and you can count on the good old Fed to bail you out”

The fundamental reasons for the inflation is debt, both public and private, and trade imbalances. The Fed is maintaining status quo as best as it can, sometimes helping bailing corporations out, which the stock market responded positively to. However, the cost is tanking the dollar overseas, which means prices of imported commodities, in particular, go up.

Some argue that it doesn’t matter, inflation happens, everything goes up in price, people get paid more and everything stays more or less the same. The process which this happens is much more complicated. First of all, employees don’t automatically get raises because their cost of living goes up. Companies will see increases in costs they can’t control so they’ll adjust costs that they can, such as headcount in addition to raising prices. People will find it even harder to make ends meet as transportation, energy, and food prices go up meaning they’ll quit their job or find ways to reduce expenses, sometimes at the expense of their standard of living, which is exactly the key point.

Oil is an imported commodity that Americans are overly dependent on for our collective standard of living. As prices go up, there is no guarantee that wages will keep pace, and there are reasons to believe that they won’t based on trends of household income over the last couple decades. Invariably, maintaining our standard of living means finding a new way of doing it, one that isn’t so dependent on imported oil. Something the American public and leaders have been extraordinarily reluctant to do.


1 Comment »

  1. […] @ 8:47 am Reuters reports that oil hit $100 per barrel.  It is worth remembering the reasons why we were paying $89 per barrel.  Yes, it has a lot to do with weaker dollars.  $100 per barrel is a psychological milestone, so […]

    Pingback by Oil Hits $100 per Barrel « Esoteric Dissertations from a One-Track Mind — January 3, 2008 @ 8:48 am

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