A variety of newspapers throughout the world have indicated that the explanation for rising oil prices has something to do with the weakening U.S. Dollar. However, when one actually examines the prices of oil versus the exchange rate of the U.S. Dollar for almost every significant currency the parity is not reflected.
The supposed reasoning for increasing oil prices given in many of the articles are that purchasing commodities like oil, gold, etc. are hedges against inflation--supposedly since oil, gold, and other commodities can be converted to other currencies if the U.S. Dollar continues to decline.
If this reasoning stands, then the rate of increase should be roughly equivalent to the most stable currency against the Dollar. After reviewing the currencies of all the G8+5 countries only one that stands most drastically against the U.S. Dollar is the clearly the Euro. No other major currencies from the group selected have performed nearly as well.
The Euro has increased against the U.S. Dollar by 50% since January of 2002 and 18% since January of 2007. However, oil prices have have increased nearly 600% since January of 2002 and more than 100% since January of 2007. There is a correlation; however, it appears that only between 8.33 - 18% of the price of oil can be explained by the currency decline of the Dollar versus the Euro. That amount probably not not significant enough to justify calling it a "cause" of oil's increase.
The relationship between a weakening U.S. Dollar and high oil prices has clearly been overstated. There must be some other rationale keeping the price of oil substantially high. Many articles reason that speculators are keeping the price of oil high. They point to unusually high demand from countries like China and India. Yet demand from China has increased only 9% from April of last year and demand from the U.S., the world's largest oil consumer, has decreased 2% from last year.
China imports roughly about 179 million barrels a year of the more than 31 billion barrels produced annually. It produces an unspecified number and does export oil. However, given the high rate of growth of 600%( or about 100% per year) I ask is the price justified? Are countries throughout the world using that much more oil?
If the world supposedly produces a total of 60 trillion dollars worth of goods and services each year (as World Bank Economists have estimated for the Global Gross Domestic Product). If the world produces roughly 87 million barrels of oil a day (or 31 billion barrels of oil each year) then how much of the world's estimated wealth does the oil that is produced represent at roughly $125 a barrel? Is that price would consume more than 6.4% of the world's resources total goods and services sustainable?
Just to provide some perspective on oil prices, in 2002 the world GDP was estimated by the IMF at 47 trillion. The production of oil for that year was 65.5 billion barrels per day (or 24.3 billion barrels a year) The value of this entire amount was roughly $25 per barrel, or 606 billion dollars. Relative to the world's GDP that was roughly only 1.3%. I believe the only question now is when will the world wake up to the unsustainability of current oil prices and what will the price be when the world finally wakes up?
--Plebus
These links to sources are in chronological order from last to first. Please post for corrections. I am not always right and I like to know when I am wrong.
1. Reuters
2. Reuters
3. Bloomberg
4. Domain B (India)
5. Kurdish Globe (Iraq)
6. Forbes
7. National Public Radio
8. International Monetary Fund
9. International Transport Newsletter
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