Charles Kadlec

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:

  • Chinese yuan, the price of oil today would be $82 and a gallon of regular gas would cost about $3.10;
  • Euro, the price of oil today would be $77 and regular gas would cost about $2.90;
  • Japanese yen, the price of oil today would be $71 and regular gas would cost about $2.75;
  • Swiss Franc, the price of oil today would be $63 and regular gas would cost about $2.50.

Thanks Mr. Bernanke!

Regards,

Charles Kadlec
for The Daily Reckoning

Charles Kadlec

Mr. Kadlec is a member of the Economic Advisory Board of the American Principles Project, an author and founder of the Community of Liberty.

  • NowherenearWallStreet

    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.

  • OccupyyoursistersBasement

    “In 2011 the USA was a exporter of fuels.”

    Your car probably doesn’t run on coal.

  • Joe

    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.

  • ChristiseveryXtiansimaginaryfriend

    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?

  • Paid429forgastoday

    I get the inflation of the USD theory but how does that explain why gas is roughly $8/gallon in the Eurozone?

Recent Articles

5 Min. Forecast
How to Profit On the Back of an “Activist Investor”

Dave Gonigam

Since the invention of the "shareholder rights plan" (i.e. the "poison pill"), most companies are relatively immune to hostile takeovers. But according to Dave Gonigam that could all change thanks to one activist investor. And if you're savvy enough, you may just be able to follow his lead for big gains. Read on...


Extra!
Why Americans Shouldn’t Worry About Income Inequality

Jim Mosquera

As the markets have continued to rally over the last several years, more and more people have touted the problem of "income inequality" in the US. But as Jim Mosquera explains, this perceived problem will likely sort itself out with the arrival of one specific market event. Read on...


One ETF to Play Asymmetric Warfare

Addison Wiggin

Almost one year ago, substation telephone cables were maliciously cut in San Jose, CA. In 20 minutes, 17 transformers were knocked out. A year on, similar threats have cropped up. Today, Addison Wiggin explains why these threats are so serious for the safety of the global economy... and shows you one way to play it...


What Small-Caps are Saying About the Current “Bubble”

Greg Guenthner

The big problem with declaring bubbles is that it really does you no good. Unless you're attempting to measure and time market moves, you're also blowing hot air. But if you keep watch for negative divergences, you have a much better shot at figuring out big market moves than the latest bubble-busters. Greg Guenthner explains...


A Simple Strategy for Investing in the US Energy Boom

Byron King

Too often investments are made in a vacuum. But as Byron King demonstrates, the global economic crash... easy money... and technological advancements are all interdependent. In particular, that connection has changed the investment calculus in the resource market. Read on to learn how...


How Gold Will Respond to Declining Discovery

Henry Bonner

Oil isn't the only resource to experience "peaks." Due to a major contraction in gold exploration over the past few years, the mining sector is no longer mining gold at its replacement rate. In other words, the amount of gold above ground is running out. And according to Henry Bonner, it will get worse before it gets better...