Is the Weak Dollar to Blame for High Oil Prices?
Plenty of analysts and economists are serving up theories about why oil prices are so high. But those theories contradict each other or are built on weak evidence. Nobody has cracked the code.
JPMorgan economist David Hensley gets paid to explain this oil price spike — and even he throws up his hands.
"The problem is that no one seems to be able to put together a coherent story as to why commodity prices are as high as they are," Hensley says. "So, we're all left fumbling around, trying to put one together on our own."
But the head of OPEC has said it's all the fault of the United States and the weak dollar.
He is certainly at least partially right. By definition, the weaker the dollar is, the less a dollar buys. The dollar has lost around 10 percent of its value in the world over the last year, so a dollar should buy about 10 percent less oil than it did a year ago. But oil didn't go up 10 percent in the last year; oil prices are up 85 percent.
"It must be the case that something else is going on here that extends way beyond the weak dollar," Hensley says.
So, if it's not just the weak dollar sending oil prices up, maybe it's supply or demand. Maybe supplies are lower than last year or demand is higher.
Hensley says this might seem like an easy question to answer, if we knew what supply and demand were. But strange as it may seem: Nobody knows how much oil the world actually demands each year.
"At the same time," he says, "we don't know for sure what the supply is at any point in time."
So, he says, we guess what the supply and demand are. And the best guess tells us that supply hasn't gone down enough and demand hasn't gone up enough over the last year to account for the huge run up in fuel prices.
"Investors are looking for a place to make money," says Jim Williams, an oil economist with WTRG.com, "and the only thing that seems to be going up is the price of crude oil."
Investors, of course, are always looking for a place to make money. But last year, Williams says, there were also the subprime housing market and stock market to invest in. Oil was one option among many. Now, it looks like the only option.
"But here's the problem that's created: You got that good idea because you saw oil going up and nothing up — so did a whole bunch of other people," Williams says. "What happens when a bunch of people want something they didn't want before? The price goes up."
This is called "speculative investment." People buy oil not because they want oil, but because they are speculating that oil will keep going up.
Now, here's what's interesting: The weaker the dollar, the more this happens. Investors turn away from U.S. investments — Apple computer or treasury bonds, for example --because the dollar keeps losing value. They don't want dollars. That makes oil even more attractive, which sends the price of oil higher. That, in turn, weakens the U.S. economy, which sends the dollar lower.
So, it's not just the head of OPEC saying it. Many believe that a weak dollar can push oil up far higher than seems to make sense.
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