Something I had wondered about was the impact of the falling value of the dollar on the price of oil versus real factors, such as increasing demand or reduced supply. These charts summarize the data. What it looks like is that the rise in the price of oil (and hence the rise in the price of gas) is partly due to real factors and partly due to monetary factors. This site summarizes the evidence as over the past several years the price of oil has more than doubled in dollars and risen about 50% in Euros. If I'm doing my math right, that means that if gas was $2 a gallon a few years ago and is $4 a gallon today, we would be paying $3 per gallon if the value of the dollar had not fallen so dramatically.
If so, then it is not obvious from a public policy perspective whether we have a gas price crisis, exchange rate crisis, both, or neither.
That you even ask whether the answer might be neither I think is pretty good evidence that you are overpaid. =)
Can someone explain to me why the falling value of the dollar has such a huge effect on gas prices (at least in the US) when the global oil market is largely dollar-based?
Doesn't matter that oil is priced in dollars. Say you're a European. Euros are what matter to you. You're willing to pay X euros for a barrel of oil. Suddenly, or not so suddenly, those euros are worth more dollars than they were before.
So from the point of view of a seller, your (dollar-equivalent) bid has gone up.
To put it another way: if one euro equals one dollar then you have to bid $100 to match a bid of 100 euros. If one euro equals $1.50 you have to bid $150 to match a bid of 100 euros.
It's because, suddenly, everyone whose native currency is not dollars (or tied to the dollar) can get more dollars for the same amount of money. Thus, they are willing to pay more dollars for the same amount of oil. Thus, their demand curve is shifted up. Since they form a significant portion of the world-wide demand, the aggregate demand curve shifts up. The supply curve is unchanged, so the equilbrium price increases.
The market price for oil changed because Congress is considering regulation legislation, and not because drilling is starting to open up? Oh, that's right. It takes twenty years for drilling to have any impact!
It is obvious-- we have a currency crisis. After his speech to some Federal Reserve function, Paul Volker was asked if were were at risk for a currency crisis. He said we are in a currency crisis.
The currency crisis is a result of too much debt-- especially private debt. In part that comes from the our lack of manufacturing capacity. Finance has replaced manufacturing as the dominant US industry-- the ratio has inverted from 1970.
I have now become a believer in peak oil. So we have a looming supply crisis. The only way out of the oil crisis is to build coal-to-liquid plants. Otherwise we are going to become poor very soon. The US GDP is overstated because the BLS has tinkered with the CPI to understate inflation which boosts real GDP. In other words, the GDP numbers coming from the government are fake. Anyone want to debate that? We ar in a recession and it's not going to go away unless we have cheap energy and rebuild our manufacturing capacity. That might require protectionism. Better them than us.
Thus, if the price of a commodity in one, lower-tax domain is L (lower) = X plus T (where X is the global price independent of taxation, and T is the cost added by taxation that is itself not linked to the commodity's price), and the price of a commodity in another, high-tax community is U (upper) = X plus 2T, then the rising value of X will affect both L and U equally in absolute terms, but L will rise at a faster rate than U, and so L's consumers and politicians will complain about the fact that their commodity's cost is inflating faster than those in U, even though the consumers in U continue to pay more.
The problems with this approach (and there are a great many) include: (1) no one can come up with a useful definition of just who the "speculators" are -- does it include participants in the futures markets who are trying to lock in future prices, like Southwest Airlines, which hedges a significant portion of its future need for Aviation fuel, or the Chemical &Plastics Industries, for which petroleum is a critical feedstock, or even the ordinary farmer, trying to lock in his costs for all of the diesel he will have to burn in his tractor, combine, reaper, hay-baler, thresher, etc., to bring in his crops, even the small independent oil producer who wants to "lock in" a profit on his production, rather than risk a drop in prices if he were to sell to a refiner later?; and (2) Even if one COULD accurately identify the "speculators" and distinguish them from the legitimate users of futures markets, like producers and users of commodities like oil, who invest in the futures markets to lock in profits or hedge against pricing risks, speculators provide liquidity to the market and provide a significant barrier to anyone trying to "corner" or manipulate a commodities market (remember the Hunt Brothers foray into the Silver markets in the early 80's?).
IMHO, people like Sean Wilson, who propose regulating markets to keep out those whom they view as harmful, have: (a) an insufficient understanding of market economics; (b) an unreasonably optomistic opinion of the efficacy of government regulation of those markets; and (c) spent FAR TOO MUCH TIME listening to (and worse, believing in) blowhard politicians promising relief that they can't deliver and selling solutions that are invariably worse than the problems they propose to solve. God save me from politicians that "only want to help"!!!
But who will save the onion buyers?
Even if the price of oil remained the same, wouldn't it have a huge imapact on our import/export imbalance and therefore strenghten the dollar? If oil is going to cost $140 a barrel, why not get in on that action.
Any economists out there?
Oil prices are have produced a problem. Real estate lending is a *crisis*.
So where is the bill that says no one call sell loans unless they plan on holding them?
"Any economists out there?"
Not that an economist would be able to clarify things for us. Or willing. Any theologians out there?
Of course it is. Gas prices are rising (the chart follows the same trends regardless of what currency you use to denominate it). The value of the dollar has also fallen dramatically over the past 5 years. Both these realities should inform this country's policies.
Whether either ought to be characterized as a "crisis" is of extremely limited relevance.
The hidden assumption here is a fallacy: that the monetary value of the Euro is constant. But the dollar, Euro, and other major currencies are all floating currencies. As described here, it's much more likely that both the dollar and Euro are falling against a hypothetical stable standard of value, it's just that the dollar has fallen more. (But not recently: since February oil prices have kept rising but the dollar has held its own against the Euro).
The value of both the dollar and Euro can fall together vs. the hypothetical stable standard of value if long-term inflation expectations for both the dollar and Euro increase. These charts vividly demonstrate the impact of expectations about long-term inflation on oil prices: the nominal net present value of oil is an exponential function of expectations about long-term inflation. For this reason, at today's high prices, the monetary impact of changing inflation expectations dominates oil prices. Only when inflation expectations are 1-2%/year or below due traditional real factors reassume a dominant role, but today's inflation expectations implied by the oil and gold prices are well above that.
Neither. We have no oil price crisis; we just have higher price that are another annoyance in a bad economy.
The poor exchange rate between the dollar and most other currencies was caused by the Federal Reserve Board raising interest rates due to unfounded fears of inflation. That worsened the mortgage repayment problem, drove the dollar down to the lowest its been in modern history, added more than $1 per gallon to the cost of gas, lowered consumer confidence because of the increased costs of imported consumer goods, etc. The Federal Reserve Board did not lower interest rates at its last meeting, and no economist I've read can give a logical explanation for this. At this point I would favor abolishing the Board and using a computer formula to adjust the prime rate.
What you are proposing is exchanging a "recession" for a depression. If you think CPI is bad now, try replacing everything we import from China with US labor. That will increase inflation further undermining the dollar raising energy prices still higher. Unemployment is still at relatively low levels, whatever problems we are having chronic unemployment isn't one of them, hence there is no possible rational for protectionism. Already estimates of GDP are rebounding, which doesn't mean we won't get a recession in 6 months or a year, but there isn't much evidence at all that we are already in one.
Me too. It's just a question of how close we are to the edge of the abyss. I don't happen to think we're too close to avoid it yet, but we're definitely close enough to see it.
That said, one ironic side effect of switching to alternative fuels is that it would reduce the demand, and therefore the price, of oil. I recall reading one peak-oil blogger's prediction that once the total world oil supply drops below a certain point, the price per barrel should flatten out and then drop like a stone, because any economies that currently depend on oil will have either collapsed or moved on to alternative energy sources. Eventually we will be left with just a tiny amount of oil, but instead of being astronomically expensive it will be virtually worthless except as a curiosity.
I may have some facts wrong, but this is my understanding:
1. Congressional drilling moratorium sunsets on September 30, right when people really start paying attention to the election.
2. Bush lifts presidential drilling moratorium on July 14.
3. Oil drops about 10% in the following week.
I'm no economist, and have no special stock/commodities knowledge. But it seems fairly obvious that (1) the price of oil is based on predictions, (2) hedge funds and other speculators behave under standard 'prisoner dilemma' patterns. In other words, if the price is going to plummet in 2015 because the supply is going to spike in 2015, then a smart investor 'X' will plan to dump his oil holdings in 2014 - to beat the curve. Investor 'Y' knows what 'X' is going to do, so he dumps in 2013. And on and on, so that there ends up being an immediate effect from any known future event. Conversely, if the known future supply of oil is going to be constant or decreasing (with dems blocking all further drilling), then investing in oil is a safe bet (since demand is indisputably going to continue to increase).
If Pelosi/Reid are clever, they will renew the moratorium now, take a little heat from the public, and then go back to blaming Bush in October. Otherwise, either (a) Congress will renew the moratorium in September and take a huge beating in the polls, or (b) Congress will let the moratorium sunset, prices will plummet, voters will be happy, and the repubs may be able to hold enough seats to filibuster.
Although I really hesitate to put my oil theories up against T Boone Pickens saying it will hit $300.
In a word, no.
Lots of things affect exchange rates, and relative interest rates are among the most important. In general, lower rates reduce the value of a currency and higher rates increase it.
Another major factor is the balance of trade. Current account deficits tend to drive the currency lower.
The key is that the whole thing really is just supply and demand. If people want dollars, to invest in the US or to buy American goods, or for some other reason the currency will rise, and vice versa. There are a lot of factors at play.
Sean Wilson, speculators are to oil prices what Vegas gamblers are to baseball scores. The one does not effect the other. Speculators simply bet on the future price of oil. Half the bets are that it will go up (against the line) and half are that it will go down. Both are betting on the underlying supply, demand, and currency fundamentals. Banning them will (1) drive them offshore, where they will keep speculating but more opaquely (2) make hedging price risk more difficult, and (3) limit information on future prices. It will not have any effect on those prices(barring the chance that the future price line will be so much higher than the spot price that it will encourage hoarding. But inventory levels are below their historic averages, so this is not occurring).
Dr. T, if the federal reserve lowered its short-term rate, it would decrease the dollar's value against the euro, not increase it. The logical explanation for not lowering the rate at their last meeting is that a loose money policy is a bad idea, and sound money is a good idea. Compare 1976-81 with 1983-1999. And "unfounded fears of inflation?" Really?
Will will have to endure some short term pain to avoid a worse result in the future. How can a large continental country remain prosperous without a solid manufacturing industry? Suppose we go to war with China? What then? We must be self sufficient. Right now manufacturing is 12% of GDP and finance is 21%. Finance does not generate wealth, it's basically moving money around. We might end up with robots doing our manufacturing, it which case we will beat the pants off everyone. But industry needs protection as it did in the 19th Century. Otherwise no one will invest in productive capacity.
"Unemployment is still at relatively low levels, whatever problems we are having chronic unemployment isn't one of them,..."
The unemployment numbers from BLS are misleading because they don't count many people who are legitimately unemployed. It's not that the statistics are phony; it's the way there are defined.
"Already estimates of GDP are rebounding, ..."
Aha! Nominal GDP is deflated using an inflation index. But in 1995 BLS made significant changes to way inflation is calculated. These include: 1. Hedonic adjustments, 2. substitution bias, and other fiddles. Note that BLS uses something called "imputed rent" for the cost of housing. Thus the whole run up since 1998 in the price of housing is not reflected in the inflation numbers. Neither are tax increases. The actual rate of inflation is something like 4% higher than than the published BLS rates. So currently inflation is running at about 9% not 5%. That's horrendous and the GDP is dropping.
How is that different from normal stocks? Or any other investment? There is always someone buying, and someone selling. Where they meet is the value. Just because one buys and one sells doesn't mean the value stays flat. How is commodity speculating any different?
I ask this as a legitimate question, not a rhetorical attack, since I know next to nothing about commodities besides what I learned in "Trading Spaces."
There should be a law that only merchants can buy oil.
There doesn't need to be. Where, exactly, are these warehouses full of barrels of oil located where those greedy speculators hoard oil in order to drive up the price? They don't exist. Speculators buy futures contracts and then re-sell those contracts to "merchants" who can accept the delivery of barrels of oil when the contract comes due. In the short-run, futures trading can impact the spot price of oil but not in the long-run.
Zarkov:
It is obvious-- we have a currency crisis. After his speech to some Federal Reserve function, Paul Volker was asked if were were at risk for a currency crisis. He said we are in a currency crisis.
If you dilute the meaning of "crisis" to mean anytime a currency depreciates by a lot over a couple of years, then yes. Otherwise, the usual elements of an actual currency crisis, such as a spike in overnight lending rates and in the yield on government debt and/or a freeze in the market for government debt, and double- or triple-digit inflation are not there.
Iceland, for instance, has a closer claim to be experiencing a genuine currency crisis as its central bank has raised the overnight rate to double-digits to keep the currency from imploding and to stop most of its major banks from going insolvent due to liabilities denominated in foreign currency. When the U.S. reaches that point, then call me.
The US GDP is overstated because the BLS has tinkered with the CPI to understate inflation which boosts real GDP
U.S. GDP is not measured in real terms using the Consumer Price Index.
1 December 2005 oil price - about $49/bbl, or GBP28.51/bbl at then current rates.
2) June 2008 price of oil - about $125/bbl, or GBP62.80/bbl at then current rates.
This implies oil has increased by 155% in dollar terms, yet only 120% in GBP terms from December 2005, through June 2008.
Source 1 US EIA
Exchange Source
Other facts:
United States: 70.593 bbl/day per 1,000 people
UK: 30.534 bbl/day per 1,000 people
act:
UK price increase: 120%
Fact:
UK bbl/day consumption: 1,692,000
Fact: US Price increase (dollar inflation): 150%
Fact:
US bbl/day consumption: 19,650,000
Conclusions?
Who contracts to buy from the producer in the future, thus allowing him to shed risk and lock in a future price?
Who contracts to sell to the user in the future, thus allowing him to shed risk and lock in future costs?
Should we remove the mechanism that allows both producers and consumers to shed risk? How well did that work before futures exchanges were developed?
Actually storing oil underground, that is just declining to pump it, is nearly costless. The big "speculators" are the oil producers who wait until its net present value, given expected inflation, exceeds the market price. Because inflation, like interest, compounds, the price of oil is exponentially larger than the expected long-term rate of inflation, as these graphics vividly demonstrate. Recent prices are dominated by this effect, that is to say they are almost entirely a monetary phenomenon that reflects long-term expected inflation in the major currencies.
Once agriculture was 95% of the economy. Entertainment and tourism used to be a microscopic part of the economy too, but things change. Don't get all 19th century on us, if it takes less effort for production and our incomes are higher manufacturing may well be exactly where it should be. Ricardo hasn't been repealed yet, nor does Congress have the jurisdiction, commerce clause or no.
Yes and the transition to a manufacturing based economy generated a lot of attention and discussion. But finance sneaked in under the radar. How many people are even aware the flip? Moreover finance exists to enable production. Finance is all about credit and credit exists to create production. Another thing, the finance guys talk about "the real economy" as though finance were not part of it.
" ... if it takes less effort for production and our incomes are higher manufacturing may well be exactly where it should be."
But our incomes aren't higher except for the upper strata. The $800 billion current accounts deficit should be a tip off that something is amiss. We don't have trade. If we had trade, the accounts would balance.
"Ricardo hasn't been repealed yet,..."
Ricardo's theory of comparative seems to be violated by our current situation as the US is getting poorer with free trade. We developed into a modern industrial nation with protectionism. If the US goes to an economy that mere manipulates symbols then why would we have a comparative advantage there?
We have another problem. Our various rules hamper our economy. There is hardly anything you can do that doesn't meet with legal barriers. How can we ever compete with countries that don't load themselves down the way we do? Then there is tech and knowledge transfer to our competitors. Boeing gave away its trade secrets to China to get a contract. In ten years China will put Boeing out of business when it comes out with cheaper airframes. China uses prison (slave) labor. How do we compete with that?
You are repeating arguments that have been discredited repeatedly since Mercantilism was the primary economic model for developed countries.
When our current accounts deficit gets bad enough then our exports will get cheaper and imports too expensive, and we'll have to pay the piper then. But it makes no sense to artificially throw ourselves back in the 50's now. Especially since most of our debt is dollar denominated so we can inflate ourselves out of debt better than most countries.
Our incomes certainly are higher across all stratas. The rich are getting richer faster than the rest of us, but we are all getting richer too.
The US is getting richer from foreign trade, the evidence is overwhelming. Just ask my 47" LCD (whoops its made here, but you get the idea).
And lastly I doubt people will fly on airplanes made from slave labor, ask Aeroflot how that all worked out.
Exactly. And since we do not unnaturally restrict sales in stocks and bonds, we should not limit them in commmodities trading.
Mercantilism is the theory that a countries economic prosperity depends on soley on its capital stock. That has nothing to do with protecting industries until they can compete. One thing you are missing is the massive size of the US in land and population. Outside of certain rare metals and a few other resources, we can produce almost anything we need domestically.
"Especially since most of our debt is dollar denominated so we can inflate ourselves out of debt better than most countries."
Wow. You propose we inflate our way out of debt. Look at what happened to Wiemar Germany when they tried that. Prices doubled every 49 hours. Hyperinflation would destroy the middle class and send the country into chaos. During WWII Germany had a project, which used Jewish engravers in the concentration camps to make counterfeit US and UK money. They intended to use this money as weapon of war by creating inflation.
"Our incomes certainly are higher across all stratas. The "rich are getting richer faster than the rest of us, but we are all getting richer too."
Absolutely not. Not even with the bogus low inflation reported by BLS. Where did you ever get the idea that all strata are getting richer in real not nominal dollars?
"And lastly I doubt people will fly on airplanes made from slave labor, ask Aeroflot how that all worked out."
That's a ridiculous example. China uses prison labor to make exportable goods not to fly airplanes. China makes people work under unsafe conditions, including air pollution, contaminated water, and lack of safety procedures. The air in Peking is so polluted that some Olympic athletes have taken to wearing masks, even in the summer, when the air is better. All this reduces their costs. We should not import anything from such a country.
Sounds like an excellent reason not to go to war with China.
It may be ridiculous, but it was your example so I'll let you be the judge:
I answered:
Of course China won't use slave labor to fly the airplanes, but airframes, avionics, hydraulics etc. made by slave labor is unlikely to be attractive to any purchaser.
The last sentence about China should have appeared in a new paragraph or as a new item in a list. It was not my intent to connect them.
China does use prison (slave) labor for some of its products. If they do use such labor to make airplane components you can be sure they will make every attempt to conceal that fact. I was mainly thinking of textiles.