22 May 2006

Oil-Price Connection on NRO Financial

John Tamny on The Dollar/Oil-Price Connection on NRO Financial: "Indeed, meat prices were rising at a 75 percent annual rate in 1973. From 1972 to 1973 the cost of a bushel of wheat rose 240 percent. Soybeans rose from $3.50 a bushel in 1972 to $12.00 in 1973. Since commodities are priced in dollars, a change in the dollar’s value has an instantaneous impact on the spot price of those commodities. The greenback’s fall in the aftermath of Bretton Woods in a sense made a broad commodity rally inevitable. Looked at in this light, while the Arab factor coupled with regulations and price-caps on fuels in the U.S. were largely to blame for the 1970s energy crisis, Fed policy unhinged from the disciplines of Bretton Woods must take part of the blame.

Moving to the late 1970s, the consensus view is that OPEC’s failure to boost output amidst the Iranian revolution explains the oil shock that closed the decade. The facts suggest otherwise. The price of a barrel of oil did increase, but it was largely a United States phenomenon relating to the falling dollar. While the dollar price of oil rose 43 percent from 1975 to 1979, the price of oil in Japanese yen rose just 7 percent, and in German marks it rose just 1 percent. In Swiss francs the price of oil actually fell 7 percent.

With oil presently trading in the $70 range, today we hear that greedy oil executives, historically high demand in China and India, political uncertainty in Iran, excessive consumerism, and restraints on domestic drilling and refining have combined to bring on the 164 percent rise of oil since the summer of 2001. That list is pretty good if you leave out the greedy CEOs and the gluttonous consumers — the Herbert Steinesque exogenous factors that have nothing to do with expensive oil. What is inappropriately left off that "

No comments: