Releasing Some Oil Pressure

0

We’ve all heard the reason gasoline prices are at record highs. It’s because of China, right? The high revving economy there is sucking up so much oil that it’s driving up prices.


The more I hear that, the more I think it’s a crock.

Oh, sure, China, India and the like are certainly guzzling more oil than ever. But that alone can’t account for the doubling of oil prices over the last year.

There are at least a couple of other reasons, reasons that are kind of subtle and don’t get a lot of press, that are really fueling the extraordinary rise in oil prices.

One is the amazing shrinking dollar. As the dollar loses value, foreign oil producers demand more dollars to keep their buying power up.

David King, a former Federal Reserve official, provided maybe the clearest explanation of the phenomenon recently in the Wall Street Journal. He wrote that five and a half years ago, the dollar and euro were equal. One dollar bought one euro. Back then, a barrel of oil cost $25 or 25 euros.

But now, a barrel of oil now costs more than 75 euros. That’s about three times more euros than in late 2002. But the same barrel costs more than $125 today. That’s five times more dollars. The reason for that disparity is that the dollar’s value has nosedived since then.

King figures that the low dollar accounts for about half half! of the increase in the pump price over the past five years.

But there’s another reason. It is the sudden popularity of commodities as investments.

Commodities trading used to be an exotic little eddy favored by producers and other players in their markets, such as farmers. No more. Commodities have gone mainstream and billions of dollars have poured in. (A few months ago, for example, the California Public Employees Retirement System authorized investing $7 billion or so in commodities.) As demand intensified, the prices of commodities all kinds of commodities, including oil zoomed.

But in all this, there is good news (unless you’re an Occidental Petroleum stakeholder, in which case it’s bad news). It’s this: The price of oil can come down. Way down.

The scenario isn’t hard to imagine. If the United States started defending the dollar, that would likely trigger an immediate drop of a few dollars and maybe more in oil prices. The fever that drove up the price of oil would be broken, and those who speculated in oil as a commodity would start to back out. As prices dropped more, investors, fearing a bloodletting, would hit the exits. The rout would be on.

If you think that’s unlikely, consider that through history, oil price surges routinely have been followed by price swoons. Oil prices leaped 150 percent in 1980 before they cratered to under $10 by 1986. A surge in prices in the early ’90s was followed by a long period of low prices, prices that again dipped below $10 a barrel in the late ’90s.

We’ve heard some predict that oil prices will never drop to $70 again. But that, too, is a crock. Oil prices were fairly stable at $30 a barrel or less in the early years of this decade, and everyone seemed pleased. Even with growing demand from China, oil today should cost about $40 or $50. There’s little reason to think we won’t see those prices again, maybe before the end of this decade.


Charles Crumpley is editor of the Business Journal. He can be reached at

[email protected]

.

No posts to display