Saturday, May 31, 2008

Dollar devaluation by FED is largely to blame for exponential oil price increase

An excellent article by Paul Van Eeden explaining the real
background to rising oil prices and who is to blame.

The Road to $200 Oil - By Paul Van Eeden of

When the crash dummies up on Capitol Hill see crude oil at $130 a
barrel, they cry "Manipulation!" and start looking around for someone
to blame. The funny thing is; they're right. Manipulation is causing
the oil price to soar...manipulation of the U.S. dollar. As for
finding someone to blame, well, taking a stroll over to the Federal
Reserve building might be a good place to start.

By increasing the supply of dollars the government devalues every
dollar in existence by an equivalent amount. The impact of this
inflation is not uniform through the economy or markets but, with
time, it does filter through to everything. If we look at the price
of oil in US dollars and simultaneously look at the inflation of the
dollar we can see that oil has in fact not gone up in value at all -
it is the dollar that has declined in value. So the manipulation is
clearly evident, but it is not the supply of oil that is being
manipulated, but the supply of dollars, to decrease the dollar's
value on the assumption that that would stimulate spending and
economic activity. That is the cause of the rise in the oil price.

If we look at the exchange rate of the US dollar against the euro,
and the twelve currencies that comprise the euro before its launch,
we see that in January 1970 it took 1.151 "euros" to buy a dollar.
Today it takes 0.644 euros to buy a dollar. For the sake of
simplicity let's use the euro-dollar exchange rate as a benchmark for
the dollar's devaluation on foreign exchange markets. From this
exchange rate we can see that the oil price would have been 44% lower
today were it not for the decline of the US dollar exchange rate.
That would make the oil price, not $120 a barrel, but only $67 a
barrel. In other words, the oil price is approximately 80% higher
today than it would have been if the government was not so hell-bent
on destroying the dollar.

For those who cannot fathom that it's as simple as this, or that
inflation of the money supply directly affects the value of the
dollar, consider these words from Ben Bernanke, the current Chairman
of the Board of Governors of the Federal Reserve Bank of the United
States, in a speech he made on November 21, 2002 before the National
Economists Club in Washington, D.C.: "Like gold, U.S. dollars have
value only to the extent that they are strictly limited in supply.
But the U.S. government has a technology, called a printing press
(or, today, its electronic equivalent), that allows it to produce as
many U.S. dollars as it wishes at essentially no cost. By increasing
the number of U.S. dollars in circulation, or even by credibly
threatening to do so, the U.S. government can also reduce the value
of a dollar in terms of goods and services, which is equivalent to
raising the prices in dollars of those goods and services."

Aside from the fact that the assumption that inflation can create
economic activity is entirely false, the idea that OPEC is somehow to
blame for the rise in the oil price is absurd. Look at the chart
below that shows the oil price in US dollars and the increase in the
supply of dollars as measured by M3. We see that the oil price is
trying desperately to catch up with the dollar's inflation. In fact,
if anything, oil companies and oil producers have been subsid izing
American gasoline consumers for the past 22 years!

The manipulation is clearly in the dollar. By rapidly increasing the
money supply and thereby decreasing the value of the dollar, the
government is directly and solely responsible for the increase in the
oil price.

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