- Petroleum is sold in U.S. Dollars. When a Russian business buys oil from a Nigerian exporter, the deal is priced in U.S. Dollars. When Australians buy oil from Indonesia, the deal is prices in U.S. Dollars. OPEC sells oil in U.S. dollars.
- The U.S. Dollar has weakened considerably against other currencies in the past few years. The euro, British pound, and Canadian dollar, for example all cost more now than they did a few years ago. The U.S. dollar is worth less than it used to be.
- Oil is more expensive in America because OPEC wants to keep getting the same amount of euros and pounds for a barrel of oil that it did last year and the year before. The only way they can do that is charge more for it, in U.S. Dollars.
- The reason the U.S. Dollar is weak is that President Bush has made policy decisions that make it weak.
You don't believe me...
There are a couple of things to consider. Let me start by saying that I understand that being President probably isn't easy. There are hard decisions. I'll accept that.
Four and a half years ago President Bush decided to invade Iraq. I don't mind saying that I think he misled Congress to get their consent to go to war - and that that was probably a crime. The projections at the time were rosy: it would be over in six months and we'd be welcomed as liberators. Iraqis would be so happy with us that they would pay for the invasion with their own oil. Fifty some odd months later those projects seem laughable. Iraqi oil hasn't help the U.S. pay off this fiasco. And President Bush has paid for the war instead by selling huge amounts of Treasury bills to other countries; he's borrowed money to fight a war while cutting taxes and increasing spending at home. Ronald Reagan's deficit meets Lyndon Johnson's unpopular war...
One result of that borrowing has been a weaker dollar.
How could it have been different? Most countries, when they go to war, institute an austerity program of some sort and raise taxes. If back in March of 2004 (a year into this war and at a time when the October 2003 budget was being formed) President Bush had suggested an austerity program to Congress and led it by making cuts to his own programs, would he still be President? That was an election year. If President Bush had repealed part of his tax cuts to pay for the war, would he still be President? I suspect the answer to both questions is "no." But political self-preservation is not an honorable motive for public policy decisions.
While the relationship between the price oil and the strength of the Dollar has received a lot of attention in the press, there is another effect that a weaker Dollar has - one that isn't getting quite as much press. A weaker Dollar is good for export industries in America and bad for imports. Boeing jets are cheaper in France now, and they French may buy more of them. BMW's are more expensive in the U.S. now, and many Americans may decide to buy a Lincoln or a Cadillac, instead.
A weak dollar is good for America's big businesses. And in it not inconceivable that the Bush administrations Dollar policy has been designed to help big business.
Remember that when the price of gas goes to $5 a gallon at the pump - probably just before the 2008 election...