Do you know why oil and prices are moving sharply higher? Some blame the oil companies, charging they are manipulating prices. Others cite US sanctions on Iran and the threat of a military encounter that would disrupt the flow of oil from the Middle East.
Speculators, too are blamed for ostensibly bidding up the price of oil. In the political arena, President Obama is taking credit for increased domestic oil production even as his critics point out the slow pace of drilling permits issued by his Administration soon will hamper additional increases in the US oil production.
Yet, the basic reason for higher energy prices is being overlooked, even though it is right before our eyes: Oil prices are up because the value of the dollar is down. Our common sense hides this source of higher prices because we view the dollar as fixed, and prices as moving. News reports explain the sharp rise in consumer prices in February were caused by higher energy and food prices, implying that higher prices cause inflation. Of course, higher prices do not cause inflation. Higher prices are inflation.
The cost of this deception goes well beyond the vilification of the oil industry and free markets. The real price of the on-going debauchery of the dollar is measured by the loss of our prosperity and the debasement of our liberty.
Neither the dollar, nor the price of individual items are fixed. Changes in the relative prices of goods and services occur because of technological change or shifts in supply or demand. The price of computers and televisions fall relative to the price of, well, just about everything. On the other hand, the freeze earlier this winter in Florida reduced the supply of oranges, leading to an increase in the price of orange juice. But, the value of the dollar also changes, usually in ways that are imperceptible over short periods of time. As a consequence, when the dollar price of gasoline rises 6% in a month, as it did in February, it appears that the price of gasoline is up, rather than the value of the dollar is down.
To see more clearly how the price of the dollar has changed, it helps to view price changes over a 10 year period. Since 2002, the price of a barrel of oil has increased four-fold, to $107 last Friday from $26 in 2002. To suggest that oil companies had enough power to impose such a price increase, or that speculators are responsible for a quadrupling of the price of oil is, on its face, preposterous. Instead, the price of oil and gasoline are up because the Federal Reserve has driven the value of the dollar down.
For example, if the dollar since 2002 had been as good as the:
Thanks Mr. Bernanke!
for The Daily Reckoning
Mr. Kadlec is a member of the Economic Advisory Board of the American Principles Project, an author and founder of the Community of Liberty.
Hi Chuck. Gas prices at the pump are falling now. In 2011 the USA was a net exporter of fuels, maybe they decided to keep more of it here at home?
That or the solution for high prices is high prices? Maybe the Wall Street boys pushed up the price too high? Betcha now they are selling their positions to those who invested their IRA or 401K money with them. Let them eat the lower prices.
“In 2011 the USA was a exporter of fuels.”
Your car probably doesn’t run on coal.
Why is it that the average American does not understand the value of the dollar? Rhetorical question? Not really; Government education is just one of the tools used by the socialist/communist/Marxist/islamofascist to dumb down Americans to the point that the average voter is too ignorant to make an intelligent decision when voting.
Gas went down another nickel at the pump over night. Using Joe’s world view, it must be the communist/Marxist/islamofascist’s who are causing it?
I get the inflation of the USD theory but how does that explain why gas is roughly $8/gallon in the Eurozone?
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