President Obama is on the warpath against the oil companies. (ht: GR) As he should be, since obviously, the evil, greedy oil companies are taking advantage of consumers–just as the economy is about to skyrocket to success as a result of the President’s brilliant strategy of extending the Bush tax cuts and tripling the Bush deficits.
Or maybe there’s another reason for increased prices at the pump.
The price of gasoline is largely a function of the price of oil, so let’s look at the price of oil. According to the Department of Energy’s website, the Cushing, Oklahoma spot price for a barrel of oil on April 26, 2010 was $84.20. On April 15, 2011 the price had climbed to $109.17. That was a nearly 30 percent increase; 29.66% to be exact.*
Did it really cost 30% more to get oil out of the ground than it did a year before? Remember, six days before the start of this study, the BP Horizon oil disaster began; now that the spill is past, we should have seen some decrease. Of course there is the ongoing crisis in Libya, but that country produced only 2% of the world’s daily output; certainly so small a reduction in supply couldn’t be the impetus for a 30% increase in cost. As for the economic climate, while we’re technically out of a recession, it’s not exactly gangbusters like it was before the banking collapse in 2008–the last time oil prices were this high. So, obviously the President is right to pin the blame on the gouging by the oil companies.
Except for one thing . . . Oil, whether it comes from under Arabian sands, from beneath the North Sea, or from Cushing, Oklahoma, it is priced in US Dollars everywhere around the world. The price is quoted in Dollars per Barrel. That means that the value of the numerator is just as important as the value of the denominator. And as you’ll soon see: lately the numerator is even more important.
Priced in US Dollars, Oil is up almost 30% in the past year. However, if we hold the exchange rates constant to where they were a year ago and show costs of a barrel oil as a percentage of where they were on April 26, 2010, we get some wildly different results.
What we observe is that the price of oil has increased in US Dollars (shown in black) much more than oil has increased if it was bought in Euros, Canadian Dollars, Australian Dollars, Swiss Francs, or Norwegian Kroners. In fact, in the two countries above which have employed strong money policies (Australia and Switzerland) we see an increase in the price of oil of only 14.4% and barely 8%, respectively.
It’s not just oil. Another commodity that has seen great increases in price–and which is priced in dollars around the world–is wheat. While increases in the price of wheat have been attributed to Russian drought and other causes both natural and unnatural (ie, increased ethanol production), a closer look shows us that the value of the dollar is again a major culprit.
With wheat we see a similar pattern. Up over 52% in US Dollars, the percentage increase is less in every other currency evaluated. Again, the Australian Dollar and the Swiss Franc showed the smallest increase, 35% and 27%, respectively.
What about gold–supposedly the ultimate store of value?
Up almost 28% in American Dollars–enough to make gold bugs giddy–the yellow metal has increased less than 13% in Aussie Dollars, and is quite stable in Swiss Francs, up less than 7% there.
But that brings up an interesting point. The ideal money, at least according to such antiquated authorities as Ludwig von Mises, is something that is a reliable store of money. That is, that it doesn’t decrease in quality or quantity over time. Gold, because it is so chemically stable, was fairly good in this regard. But since we now deal in fiat currencies, let us compare currency stability as well as inflation.
Above I’ve calculated the price of each of three commodities in six different currencies and shown the standard deviation of their prices as a percentage of the mean over the past year. For all three commodities, we see that the US Dollar has the highest standard deviation. In other words, it has the most volatility or the least predictability. Predictability in pricing is important to the baker and to the refiner. Each buys raw materials today at a price that he thinks will allow him to make a profit on a finished good at some time in the future. But what we see here is that the price in dollars is the least predictable.
Manufacturers in Bern and Brisbane have, not only more price stability than do producers in Boston, they also enjoy lower rates of inflation. Even more astounding, Bostonians fare even worse than the residents of Brussels. Given that the Euro is a virtual basket case as a result of two bailed out economies (Ireland and Portugal) and a third bailed out country virtually certain to default (Greece), the fact that the US Dollar by every meaningful measure fares even worse, maybe the problem is much greater than the oil companies.
Maybe the problem behind why it takes so many dollars to fill a tank with gas is the US dollar itself.
*Just so I’m not accused of cherry-picking my dates, I pulled data for 365 days, but because I wasn’t able to find complete information for the most recent dates of the period, The period I’ve considered, 26 April 2010 through 15 April 2011, is a bit less than a full year. Readers are encouraged to update this through 25 April of this year. However, since the price of commodities has skyrocketed again this week while the value of the dollar has fallen, I suspect that the most updated data will only add more substance to this study.
Also, I’ve looked at pricing in Japanese Yen and British Pounds as well. I didn’t consider them as alternatives to the dollar because each of those countries have employed a loose money policy and a high deficit, just like the United States. Not surprisingly, both currencies show rates of inflation and volatity similar to those of the dollar. In dollars wheat is up 52.44% over the past year. In pounds it is up 63.22%, and in yen it is up 57.02%. Oil is up 29.66% in dollars, 38.82% in pounds, and 33.55% in yen. As for volatility in pricing, both the pound and the yen are within a percentage point of the dollar.
The bottom line: countries which have employed strong (or at least stable) currency policies have fared far better over the past year than the dollar.