This piece was co-authored by Dr. Roy Cordato.
Most people haven’t noticed, but two apparently different headlines share something close in common:
Gas prices keep going up, which is ubiquitous these days, especially in local outlets.
Dollar weakens…from a recent Bloomberg.com piece: “The Dollar Index fell to a three- year low and gold climbed to a record after the Federal Reserve renewed its pledge to keep U.S. interest rates near zero.”
In fact, the dollar has been trending downward against a market basket of world currencies for at last 18 months and has experienced a free-fall since “the Bernank’” announced “quantitative easing 2” (QE2) back in November. (Here are the data).
So what does all this have to do with the price of oil and gasoline? A lot, actually.
Oil is bought and sold on world markets using the dollar. The greenback is the official currency of oil trading. We typically think of the prices of crude oil and therefore gasoline as being the result of direct changes in the supply and demand for oil. If the supply increases (or demand falls): for example if OPEC increases its production quotas, we expect the price of oil to decline. If the supply falls (or demand increases), we expect the price of oil to rise. So when we turn on the news or listen to pundits talking about the price of gasoline, we see finger pointing at particular demons whose activities directly impact the supply and demand for oil, i.e., OPEC, oil companies, refiners, speculators, etc. The list of villains goes on.
Unfortunately, most of these pundits are ignoring the other side of the oil-for-dollars trade. Just as an increase in the quantity of oil decreases the value (i.e. price) of oil, an increase in the quantity of dollars decreases the value of dollars. On international oil markets, this means more dollars are required to purchase the same amount of oil. Sellers of oil will demand more dollars for each barrel because the dollars they are receiving buy them less in terms of other goods and services. As the Fed pursues a policy of keeping the value of the dollar low relative to other currencies, it’s driving up the price of oil.
So you have Ben Bernanke to thank for some of the sticker shock at the Chevron.
If President Obama is truly concerned about reducing oil prices — which, for reasons below we believe is not the case — he should not join in pointing fingers at speculators or big oil companies. Instead, he should take a look at the policies of his own Fed chairman, Ben Bernanke.
While many on the right complain about China’s manipulation of the price of its currency on global markets, it’s the Fed’s manipulation of the supply of dollars — designed to drive down the value of the dollar on world markets — that is responsible for oil and gas prices being as high as they are.
We should also not assume that the president is ignoring the role of the Fed in all this because he’s ignorant of these basic economic relationships. Instead, Bernanke may actually be doing Obama’s bidding by pursuing a cheap dollar and expensive oil policy.
Recall Obama’s energy secretary Steven Chu said he would like to see Americans paying European prices at the pump (i.e. $5, $6, or $7 a gallon.) Indeed, global warming alarmists, President Obama included, believe that the use of gasoline is destroying the planet. High gasoline prices and taxes will, in their view, “nudge” Americans to decrease their usage. Such “nudgery” has been a part of their agenda for decades.
Bernanke’s policy is effectively such a “nudgery” gasoline tax.
From a political perspective, this hidden tax is much better than an outright tax precisely because it’s so easy to hide. Consider: apart from this post, have you heard anyone blame the Fed? Printing money has all the impact of a tax on people’s lifestyles and choices without any of the transparency that would come with a direct tax. You can continuously raise that price without any legislative action — then you get someone like socialist Sen. Bernie Sanders (I-VT) to blame the speculators and the profiteering oil companies.
Wait. Raise taxes? Pick on Wall Street and the oil companies? “Nudge” demand — all without having to stand by it? That’s a “win-win-win” in the eyes of the administration.
You’ve simulaneously conjured up demons to slay in the eyes of the public, whereupon you can ride in, like green knights, to rescue America from the capitalists and oil gamblers. Meanwhile, the true culprits — President Obama, Ben Bernanke and Bernanke’s cronies at the Fed — get away scott free (again).
Dr. Roy Cordato is Vice President for Research at the John Locke Foundation. Max Borders an Austin-based writer who blogs here.
