The price of eggs . . . and oil

By Frank Dixon
Guest Columnist
Published: August 18, 2008

Four factors other than supply and demand have brought about the recent increase in the price of oil.

Monetary exchange rates

Oil trades on the world market in U.S. dollars. This became the custom because the dollar had a “golden” reputation as a solid currency whose value remained relatively strong versus other currencies. But in 2001 the U.S. government instituted a weak dollar policy, designed to increase the purchasing power of foreign currencies for American made products.

But the U.S. does not export oil; we import it. Consequently, as the dollar weakened the price of oil to Americans had to increase.
In 2001 the Euro was worth 88 cents. Today it’s worth 155 cents. The 77 percent decline in the value of the dollar brought about a comparable increase in the price of oil (and thus, of gasoline.)

Speculation

Oil is traded on the futures market. Ideally, this market permits major consumers to hedge their risks. The “futures” price changes on the basis of perceived market forces that affect the commodity being traded.

Those who trade futures contracts for a living react to more than mere supply and demand. They take into consideration all the forces that might conceivably affect the price.

They also use all the tactical advantages they can find within the law. The so-called Enron loophole is one such advantage. It has permitted well-heeled speculators to manipulate the futures markets.

At various times in the trading cycle, investment bankers have owned and traded more than 55 percent of all the futures contracts for oil.

Market turmoil

Recent problems in the banking industry have produced concern for the dollar and for the price of oil. Bonds backed by sub-prime mortgages have become worthless. This has cost banks a fortune, and when banks lose money the entire economy is threatened, by which is meant, the dollar may die as a viable currency. If the currency collapses, rampant inflation takes over, and the price of all goods increases by unmanageable amounts.

Speculators—who are honor bound not to a nation but to their bottom line—are the first to become aware of this possibility.

Trouble in the middle-east

As war and rumors of wars circulate around the places where oil is mined, the perception intensifies that the supply of oil might be diminished. And, as is reasonably clear, we are experiencing what might be termed a mite of trouble in the middle-east.

These four factors have affected the recent rise in the price of oil . . . and consequently the price of gasoline.

A longer version of this article appears at http://benedicts.blogster.com/the-price-of-tomatoes-er-oil_240608090507.

(Guest coluimnist Frank Dixon is a retired computer security guru who lives with his wife Bonnie in Criglersville. He and Bonnie recently traded a gas-guzzler for a hybrid automobile. Contact him via e-mail at .)