Oil and the Dollar

Gas prices are once again north of $3, and politicians have wasted no time addressing the issue. Some blame "big oil" for price gouging. Others say it's the increased demand of the summer of driving season coupled with lower refining capacity. Still others point to a terrorism/war premium. Unfortunately, none of these politicians seem to understand enough about the oil market to identify one of the primary causes of oil's upward trajectory. Namely, the falling dollar.

The three current oil markers are all US dollar denominated: North America's West Texas Intermediate crude (WTI), North Sea Brent Crude, and the UAE Dubai Crude. The two major oil bourses are the New York Mercantile Exchange (NYMEX) in New York City and the International Petroleum Exchange (IPE) in London. As the value of the dollar falls, it makes perfect economic sense for OPEC producing nations to raise the dollar price of oil to make up for monies lost when dollars are converted back to local currency. Politicians can continue to blame all sorts of mysterious and unquantifiable sources for high gas prices. In reality, the weak dollar policies of the US Government- namely huge trade and budget deficits - are a primary and often overlooked cause of the problem.