Since then, the major war spending and economic deficit caused the dollar to lose around 1/3rd of its value. Factor in an average 5% annual inflation rate and it turns out that the $3.65 price we have today is dead on. Had the dollar stayed pegged to the Euro, we’d be paying around $2.66 a gallon. If you’d like to think about this in another way, there has a been a 33% flat tax enacted on anyone owning dollars in the world to finance the war.
You could argue that the cost to extract and ship the oil should get cheaper because of technological advances but large developing countries like China and India require fuel for economic growth and have driven demand up.
Crude oil in most countries is priced in US dollars. The fact that that currency has dropped vs the Euro is of no relevance to crude’s increases in US dollars, inflation adjusted or not.
Furthermore it was $US20 per barrel only 10 years ago and $40 a barrel only 4 years ago. The subsequent increases by 600% over a decade, or 300% over 4 years, are not explained by currency movements and/or inflation.
I have limited education in economics, but it seems logical that even though oil is traded in dollars, the objective value of the dollar has fallen, and hence, more of them are required to represent the same value. If the dollar dropped half its value, it makes sense that a given commodity would require twice as many dollars to pay for. But again, my economics knowledge is limited so clarification would be helpful.
Askance is right on the money. Another thing to mention is that the US dollar is not pegged to the Euro (nor vice versa). The US dollar is the standard of free floating currency.
Oil is priced in dollars because that is a dollar amount that most people understand and is set (nigh perfectly) by the market forces of supply and demand. IOW, people know what the value of the dollar is. Also, the dollar is the world’s defacto currency, so pricing it in dollars makes is only natural. To price Oil in a currency with major fluctuations like the ITA Lira (back when it existed) would have caused panics in the markets and would have caused even more rampant speculation.
There was a graph i saw recently (but can’t find) that showed how over the last X number of years, the price of oil in oil has increased ~230% in dollars while it has increased only ~70% in euros. I think it was over the last 5 years.
Obviously my numbers are shaky, but the take home is that yes, oil prices have risen considerably. But a lot of it for Americans is the declining dollar.
Better to say, Europeans have been cushioned from it by the rising euro. As oil is priced in American dollars, rising petrol prices in the US can have nothing to do with currency movements.
For what its worth, the guy on Marketplace (NPR economics show) a few nights ago disagreed. Oil may be priced in dollars, but a large fraction of it is sold to people who pay in Euros or Yen or whatever, so the falling dollar does make oil more expensive for US buyers.
ETA: also, I don’t think its true that all oil prices are tied to the dollar. OPECs are, but the US top oil importer is Canada, which I presume prices its oil in the Canadian dollar. Norway sells there in pound sterling, etc.
Just to clarify, the oil is not tied to the dollar, it’s just priced in dollars. If the dollar goes down, it doesn’t necessarily effect the price of oil. It’s only referred to $/barrel as a point of reference. In other countries, they say that oil is $X/barrel, and then translate it to its foreign currency. Also, I think you mean to say that Canada is the top exporter of oil to the US. There is no reason for any of them (Canadians) not to accept US dollars.
I fail to see how that follows. In any case, they pay for it in US dollars; it just costs them fewer Euros to buy the US dollars.
Nope. Oil is largely traded on the international market which operates in US dollars. The only exception would be if a side-deal was made directly between a supplier and seller, and that could be in any agreed currency of course. The fact Canada is the US’s major supplier is purely a function of proximity (lower transport costs) and stability (the US would prefer not to further enrich Venezuela or Iran if they can help it) rather than currency. The US buys on the world market as it sees fit; as crude is a fungible it doesn’t matter where it comes from, in economic terms. The same applies to Norway/Britain.
Interestingly, Iran has been trying to get the Euro to replace the dollar as the medium of oil trade, with some interest from Russia. But the Iraq invasion has more or less killed that because - surprise surprise - the US administration insisted Iraq use the US dollar standard, even though selling it in Euros would have benefited Iraq greatly.
Sorry for the delay in answering. I forgot this thread… :smack:
Now, there is new data being discussed in this thread and I’m reposting what amounts to a clarification of my reasoning. Have at it.
I’ll have a shot at answering your question, though I’m no economist.
Debt is a liability. Whenever you lend money to someone, you wager that they will live and prosper long enough to repay you, preferably with an interest rate that meets or exceeds inflation.
The odds of that happening are never 100%. The longer the time period, the worse the odds are for the lender to get the (entire) loan back. When lenders to the U.S get scared, they might decide to sell dollars at a loss to get what is perceived as a more stable currency (euros, swiss francs, yens). Anyone who traded their dollars for euros in the late 90s would be very happy now
Thus, the greater the debt, the less faith lenders have they’ll be repaid in time with strong currency and the lower its international market-value.
Others have addressed the oil issue, but I’d just like to point out that you can’t just assign the drop in the value of the dollar to “the war”. That may be one contributing factor, but it isn’t the only factor. More to the point, but perhaps even more difficult to measure, is the effect the war has had on the price of oil because of perceived destabilization in the Middle East due to the war in Iraq and increased tensions with Iran.
Don’t forget Iran. They have an interest in pumping up the perception of instability since their economy is in the dumper and they need every petrodollar they can get. Not to mention that their cost of extraction is something like 10 or 20x that of Saudi Arabia.
This is a good start, but it isn’t exactly correct. The short answer is that a country’s large national debt (better characterized as a percentage of GDP) puts downward pressure on its currency.
The debt is further re-balanced (pushed upwards) by the interest rate paid back on the bonds, T-notes, etc. However, even this doesn’t even tell the whole story, though your little explanation does figure in the intangibles, i.e. lack of consumer confidence. That is why the Japanese economy isn’t in hyperinflation though having a national debt something like 132% of GDP, where as a weaker economy might be pushed to edge of bankruptcy or panic if it nearly defaults on its loans (not concrete examples, but South Korea, Thailand, and Mexico come to mind).