There was plenty of news this morning about overnight trading of oil futures nearing $100.00 USD a barrel for December delivery of US Light Crude. It was not a shock to me because of various trends that have been clear for weeks. What was surprising to me was how the US media portrayed causes for the increase. I did a quick read on CNN.COM (US Edition), the Fox News’ website, and a few regional newspapers and they all spent the first few paragraphs of each story focusing on the idea that "fears of dwindling supplies in the United States", a "suicide bombing in Afghanistan that killed at least 35 people" (CNN), a "Yemen oil pipeline attack", or "market speculators" (Fox News) are to blame for the rising prices.
An interested reader would have to jump over to Forbes or the Financial Times to get the full picture and see that the biggest factor in the rise in oil prices are economic in nature. Both stories about the issue on these and other financial news sites point out that it is the weak dollar that is pushing oil prices higher and higher recently. I know most people in the US don’t seem to care about the value of the dollar but they really certainly seem to care when the pump price of gasoline goes up a few cents. When the US dollar is weak it’s Americans who suffer most from rising energy prices.
Most of the world’s oil is traded for US dollars. In fact, several oil-producing Gulf Arab countries, including Saudi Arabia, peg their currencies to the dollar, since the dollar is the currency used in the international oil trade. When businesses or traders in a country like Canada or Australia wants to buy petroleum they must first buy US dollars and then use them to purchase the oil. The cost of those US dollars determines the true cost of a barrel of oil in those countries. Right now, with the US dollar at record or near record lows against other currencies the high price of a barrel of oil disproportionately affects Americans.
I did some number crunching to try to put this in perspective. I looked at a few factors and applied them to the US dollar and five other currencies so you can see how this rise in price per barrel of US Light Crude has affected different currencies. First I located the price per barrel for US Light Crude on June 1, 2007 and found it to be $65.08. Second, I looked at the closing price yesterday (November 6th, 2007) of $96.70.
Since oil is traded in US dollars we can see that this reflects a price increase of 48.59%. You can do the math yourself with this formula:
Or for US Dollars
I’ll be rounding to two decimal places, so this becomes 48.59%
As you can see, Americans who are already working in US dollars saw a nearly fifty percent increase in the cost of a barrel of oil between June 1st, and November 6h of 2007.
To work with the other currencies, I first converted them into US dollars at the exchange rate for that day. So for the June 1 figures, I looked at the exchange rate for June 1st, for November 6th, I looked at November 6 rates. This should put everyone onto a common level since we will be comparing apples to apples instead of juggling back and forth between currencies. I will start with those who have benefited the least from the weak dollar and work up from there. I am including graphs of these other currencies’ exchange rates with the US dollar so people can better understand that the term "weak dollar" is a bit euphemistic compared to the reality of just how weak it is at the moment.
Great Britain (GB Pound)
120 day graph of the GB Pound to Dollar exchange rate (June 1 – Nov 6, 2007)
On June 1st, it took 32.86 pounds to purchase enough Us dollars for a barrel of oil. On November 6th, it took 46.36 to buy a barrel. Based on the formula outlined above we can see that the increase for Great Britain is 41.08%. In other words, the British are suffering from higher oil prices, but not as much as we are in the US.
Japan (Japanese Yen)
120 day graph of the Yen to Dollar exchange rate (June 1 – Nov 6, 2007)
On June 1st, it took 7946.26 Japanese Yen to purchase enough Us dollars for a barrel of oil. On November 6th, it took 11073.11 to buy a barrel. Based on the formula outlined above we can see that the increase for Japan is 39.35%. The Japanese are also suffering from higher oil prices, but not as much as we are in the US.
120 day graph of the Euro to Dollar exchange rate (June 1 – Nov 6, 2007)
On June 1, 2007, it took 48.42 Euros to buy one barrel, and on November 6th, it took 66.43. This is a 37.19% increase. Bad, but not as bad as it is here.
120 day graph of the Australia Dollar to Dollar exchange rate (June 1 – Nov 6, 2007)
On June 1, 2007, it took 78.29 Australian dollars to buy one barrel, and on November 6th, it took 104.51. This is a 33.49% increase.
120 day graph of the Canadian Dollar to Dollar exchange rate (June 1 – Nov 6, 2007)
On June 1, 2007, it took 68.99 Canadian dollars to buy one barrel, and on November 6th, it took 89.37. This makes Canada the big winner with an increase of "only" 29.54%. Canada’s currency is making great strides against the US dollar lately and this current trend has not only increased their buying power in purchasing Us goods, its also given them a steep discount on the price they pay for oil. It’s probably worth noting that Canada is a net exporter of oil, unlike the rest of the countries mentioned in this post.
We have had two terms of Bush spending his ass off, usually with the backing of a Republican congress that couldn’t be more eager agree with the president’s belief that the "war on terror" and economic growth and tax cuts justified running up massive deficits that everyone knows we can never repay. More recently we have seen two consecutive interest rate drops from the Fed while watching our housing sector tank and mortgage backed securities result in huge losses for financial institutions worldwide, we should not be surprised that nobody really wants US dollars to play a big roll in their portfolios. I don’t think we are near the end of this cycle and if we do see oil hit $100.00 USD a barrel we need to remember that we may be alone in paying the full price.
Notes: Graphs courtesy of www.x-rates.com and thanks to Lorianne for helping me find the formula I needed.
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