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Oil and the Dollar
DATE:2008-1-19  FROM:  AUTHOR:  DOWN:2523
 

Oil prices finally hit $100 a barrel this week, albeit briefly, but breaking through that symbolic barrier is ominous and higher gasoline prices are sure to follow. Supply disruptions in various places and surging demand in China and India are part of the explanation for this decade's upward trend in oil prices. But perhaps the biggest factor has been largely overlooked: the decline in the value of the dollar.


Since 2001 the dollar price of oil and gold have run in almost perfect tandem (see nearby chart). The gold price has risen 239% since 2001, while the oil price has risen 267%. This means that if the dollar had remained "as good as gold" since 2001, oil today would be selling at about $30 a barrel, not $99. Gold has traditionally been a rough proxy for the price level, so the decline of the dollar against gold and oil suggests a U.S. monetary that is supplying too many dollars.


We would add that the dollar price of nearly all commodities -- from wheat to corn to copper to silver -- are also surging, a further sign of a weakening currency. On Wednesday alone the price of wheat and soybeans increased 3.4% and 2.8%, respectively. That follows a 75% increase in their price in 2007 -- which ran ahead of the oil price, which gained a mere 57% for the year. Neither OPEC nor China caused food commodity prices to rise like this. The main culprit here is a global loss of confidence in Federal Reserve policy and the dollar.

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