Honey they shrunk the dollar!

I can't bear to listen to the sound of our whining, hypocritical Congress. This week the Senate Judiciary Committee held "hearings" to investigate high oil prices (what do oil prices have to do with judicial issues?). The quotes from certain Senators posing as "concerned protectors of hard-working Americans" make me gag. Diane Feinstein, all innocence and outrage, accused oil company executives of "having no ethical compass about the price of gasoline.” Feinstein and her Congressional cohorts are the ones without compasses. They know the real reasons for high oil prices. And so do we:

1. Growth in world-wide demand for oil.
   
2. Stupid, stupid, stupid (did I mention stupid?) US energy policies, which have done nothing but encourage consumption.
3. Tightening oil supplies (there are fewer and smaller new oil fields coming online, and older fields in places like the North Sea and Mexico are running dry).
4. The weak dollar (if the dollar was as strong today as it was in 2001 the price of a gallon of gas today would be about $2.70)
   

I hesitate to give the impression that I think that high gas and oil prices are a problem, because I don't. Given Congress's lack of spine and Bush's belief that a legitimate energy policy consists of drilling in Alaska and begging the Saudis to pump more oil, we need high prices to force us to cut our consumption of petroleum. But one thing that we ignore when we complain that those OPEC meanies and oil company bullies are kicking sand in our faces, is how much of a role the diminished dollar has played in making oil prices appear higher.

Since 2001 the price that Europeans and Asians pay for oil has doubled, while for Americans the price has quadrupled. Similarly, since 2001 the price of gasoline in Europe has increased about 40%, while the price of gas here in the US has grown 110%. The reason for the difference has little to do with market dynamics, it's because the dollar has shrunk in value compared to other currencies. It's not just oil, the same thing is happening with other commodities, like gold (see chart below). In 2001 the Euro and the dollar were equal in value, whereas today the dollar will only buy you .6 Euros. If the dollar had remained as strong as the Euro, today we Americans would be paying $70-$80 for a barrel of oil, and (as mentioned above) about $2.70 for a gallon of gas.

The dollar's value is akin to our credit rating, and as far as the rest of the world is concerned, our credit's in the toilet. Since 2001 (remind me, who moved into the White House in 2001?) the dollar has lost half its buying power in world markets. This is because of the huge budget deficits we’ve run up to pay for Bush’s tax cuts and the wars in Iraq and Afghanistan. It's also a result of our ballooning trade imbalance which comes from importing far more than we export, and borrowing money to pay for all those overseas goodies (we are China’s biggest debtor). And the dollar has shriveled significantly from our mortgage and banking crisis, and the fact that the housing portion of the US economy has lost 25% of its value in the past two years.

Price of gallon of gasoline in Euros or Dollars	2001	2008	Change
Belgium	€ 3.75	€ 5.43	+45%
France	€ 3.75	€ 5.20	+39%
Germany	€ 3.77	€ 5.30	+41%
Italy	€ 3.72	€ 5.36	+44%
Netherlands	€ 4.17	€ 5.95	+43%
UK	€ 3.04	€ 4.33	+42%
US	$1.87	$3.94	+111%
Relative value of the Euro and Dollar	2001	2008	Change
Price of gold in Euros	€ 275.00	€ 550.00	+100%
Price of gold in dollars	$275.00	$900.00	+227%
Value of the Dollar in Euros	€ 1.05	€ 0.65	-38%
Price of bbl oil in dollars	$30.00	$130.00	+334%
Price of bbl oil in Euros	€ 30.00	€ 65.00	+115%

Congress wants us to believe that high gas prices are somebody else's fault, and so they hold hearings to pin the blame on greedy corporate execs and callous OPEC sheiks. They're hoping that we won't notice that because of our shriveling dollar, gas prices have risen twice as fast here as in Europe or Japan. So far we seem to be buying the ruse. The average citizen, and even the typical reporter, gives little thought to what it means to be living in a world economy. We assume that the dollar is rock-steady, and oil price increases will disappear in a flurry of committee hearings. Instead of applauding Congress for playing the blame game, we should be holding them (and the Bush Administration) accountable for their head-in-the-sand economic policies that have cut the purchasing power of the dollar in half, and for wishy-washy energy policies which have done nothing to cut US consumption of oil.