Treasury Secretary Paulson: Don't Blame Dollar Weakness for Oil Price Rise

donsutherland1 · 07-03-08, 12:20 PM

Today, U.S. Treasury Secretary Henry Paulson argued that the weaker U.S. dollar should not be blamed for rapidly rising oil prices. Reuters reported:

"The dollar has had a very small impact," Paulson told reporters in London, after a meeting with top British bankers and British finance minister Alistair Darling.

"Take a look, the dollar has depreciated roughly 24, a little bit less than 25 percent, since February 2002. Oil has gone up well over 500 percent. It's gone up in every currency."

Not exactly. As the price of crude oil is denominated in dollars, changes in the dollar's value has an impact. In this case, dollar weakness amplified the increase in crude oil prices stemming from a combination of fundamental and geopolitical factors.

Using Mr. Paulson's timeframe, the price of crude oil rose from $20.40 per barrel on February 1, 2002 to $143.57 per barrel yesterday. If one factors in the change in the U.S. dollar over that time as per the Federal Reserve's Broad Dollar Index, had the U.S. dollar not decline, the equivalent price of oil would have been $105.61. Hence, Americans would be paying $37.96 per barrel less had the dollar not depreciated. Had the dollar actually increased 10% in value over that time, the price of oil would have amounted to $96.01 per barrel. Under that scenario Americans would have been paying $47.56 less per barrel.

Of course, the lower dollar-equivalent price would likely have led to greater U.S. consumption, so the actual savings would probably have amounted to somewhat less. Nevertheless, the drop in the dollar has amplified the trend toward higher crude oil prices and the impact has not been "very small."

obvious Child · 07-09-08, 04:40 AM

Sutherland, a number of people here have been arguing that the dollar is one of the key reasons. Why is that so many people have a hard time dealing with the relationship between the declining dollar and oil prices?

DarkWizard12 · 07-09-08, 06:17 AM

How much has inflation went up since 2000 or even 2004?

donsutherland1 · 07-09-08, 07:46 PM

Obvious Child,

If policy makers highlighted the role the depreciating U.S. dollar has played in amplifying the role of rising oil prices, one would then have to point to the causes of such a decline, some of which are directly policy-related. Several factors are involved:

1) Expectations for the U.S. economy relative to the world's other economies. This is a function of macroeconomic dynamics, competitive factors, policy choices, geopolitical risk, financial flows, etc.

2) Interest rate spreads: This would place added attention on the issue as to whether U.S. interest rates are too low e.g., is monetary policy too accommodative.

3) U.S. fiscal position: This would call attention to the breakdown in fiscal restraint that has occurred in recent years. At present, neither the Administration nor Congress appear willing to become more fiscally responsible.

4) Current account deficit: The trade imbalance has been unwinding. However, oil imports may well impede how far the trade imbalance can unwind. On Friday, the latest trade statistics may reveal that U.S. oil imports reached or exceeded 50% of the total monthly trade deficit. While much of the trade deficit is on account of competitive factors, the disproportionate role imported oil is playing highlights the absence of a credible energy policy.

donsutherland1 · 07-09-08, 07:49 PM

Dark Wizard,

The inflation rate as measured by the Consumer Price Index has varied as follows:

2000 3.4%
2001 1.6%
2002 2.4%
2003 1.9%
2004 3.3%
2005 3.4%
2006 2.5%
2007 4.1%
2008 Likely at or above 5% on a year-to-year basis when the August CPI comes out.

obvious Child · 07-09-08, 09:43 PM

Quote:

Originally Posted by donsutherland1

[left]Obvious Child

So essentially they are obscuring the issue because they don't want to admit they screwed up?

donsutherland1 · 07-09-08, 11:35 PM

Quote:

Originally Posted by obvious Child

So essentially they are obscuring the issue because they don't want to admit they screwed up?

Many motivations might be driving them. Some possibilities include but are not limited to the following:

1) Ideological/philosophical considerations and differences
2) The policy choices that might be required e.g., cutting the budget deficit, might be unpopular or difficult to achieve
3) Unwillingness to accept a degree of responsibility for bad policies
4) Desire for a weak dollar without explicitly mentioning it, as a weak dollar might favor some exporters
5) Belief that non-intervention will work out with the dollar stabilizing on its own

galenrox · 07-12-08, 01:52 AM

Quote:

Originally Posted by donsutherland1

Today, U.S. Treasury Secretary Henry Paulson argued that the weaker U.S. dollar should not be blamed for rapidly rising oil prices. Reuters reported:

"The dollar has had a very small impact," Paulson told reporters in London, after a meeting with top British bankers and British finance minister Alistair Darling.

"Take a look, the dollar has depreciated roughly 24, a little bit less than 25 percent, since February 2002. Oil has gone up well over 500 percent. It's gone up in every currency."

Not exactly. As the price of crude oil is denominated in dollars, changes in the dollar's value has an impact. In this case, dollar weakness amplified the increase in crude oil prices stemming from a combination of fundamental and geopolitical factors.

Using Mr. Paulson's timeframe, the price of crude oil rose from $20.40 per barrel on February 1, 2002 to $143.57 per barrel yesterday. If one factors in the change in the U.S. dollar over that time as per the Federal Reserve's Broad Dollar Index, had the U.S. dollar not decline, the equivalent price of oil would have been $105.61. Hence, Americans would be paying $37.96 per barrel less had the dollar not depreciated. Had the dollar actually increased 10% in value over that time, the price of oil would have amounted to $96.01 per barrel. Under that scenario Americans would have been paying $47.56 less per barrel.

Of course, the lower dollar-equivalent price would likely have led to greater U.S. consumption, so the actual savings would probably have amounted to somewhat less. Nevertheless, the drop in the dollar has amplified the trend toward higher crude oil prices and the impact has not been "very small."

Obviously the weakness of the dollar is a major source of the increase in oil prices, but it's fair to point out it's less significant than the development of India and China and the unsureness surrounding the future supplies of oil coming from the middle east (and to a lesser extent Russia and Venezuela).

obvious Child · 07-13-08, 10:23 PM

Quote:

Originally Posted by galenrox

Obviously the weakness of the dollar is a major source of the increase in oil prices, but it's fair to point out it's less significant than the development of India and China and the unsureness surrounding the future supplies of oil coming from the middle east (and to a lesser extent Russia and Venezuela).

Horse crap.

India and China haven't increased their consumption anywhere near to cause that.

India Oil - consumption - Economy
Real Instituto Elcano

India used 2,130,000 barrels per day in 2004 and 2,438,000 in 2008. Hardly enough to cause global prices to rise to what they did. In 2004 China used around 6 million barrels per day and is now at 6,930,000 per day.

Hardly enough to cause the price to double. Saudi Arabia has enough spare to meet that now.

American · 07-14-08, 01:18 PM

Increasing oil production and refining capacity domestically should reduce the price of refined products. Well then, if Big Oil is so big, how come they don't drill wherethehellever they want?