Bush’s Weak Dollar Responsible For Half Of Oil’s Price Increase

Today, the Center for American Progress released a report by Senior Fellow Scott Lilly explaining how the weak US dollar effects the things on the minds of middle class Americans — rising gasoline, food, heating and electricity prices. The US dollar, whose value has dropped by 37 percent against the euro, 31 percent against the Canadian dollar and 17 percent against the British pound since 2000, has plummeted most dramatically in the last 18 months.

CAP’s report shows that, although a variety of factors influence the price of oil, including growing global demand and the so-called “security premium,” over half of the increased price American consumers are paying for oil is attributable to the weak dollar.

— As the dollar falls against the euro and other major currencies, oil-exporting states have been demanding more dollars per barrels of oil to protect their ability to meet expenses paid in euros and other currencies. commodity.JPG

— Global institutional investors have tried to protect themselves against further declines in the dollar by moving money into commodity future that are denominated in dollars so that their investments remain stable when the dollar falls. The increased demand for these commodities artificially pushes up prices.

But why is the dollar so devalued? CAP’s report traces the bulk of the dollar’s decline to seven recent cuts in the Federal Funds Rate over the past nine months by the Federal Reserve. The lower the interest paid on a currency, the less likely foreign investors will will be to invest in instruments denominated in that currency, and the more likely U.S. investors will want to search for better returns overseas.

exxon.JPGWhat’s most interesting is that under a devalued currency, oil companies stand to gain significantly in comparison to other businesses. Denominated in dollars, energy companies increase in value proportionately to the dollar’s decline. Exxon Mobil, for example, one of the nation’s largest oil companies, has seen its share price increase in precise parallel to the appreciation in the price of a barrel of crude oil. The government’s monetary policy, along with the weak dollar, not only create winners and losers in terms of consumers and businesses, but also benefit certain businesses far more than others.

Read the full report.