Commentary
From Bloomberg.com: "The Dollar Index fell to a three- year low and gold climbed to a record after the Federal Reserve renewed its pledge to keep U.S. interest rates near zero." In fact, the dollar has been trending downward against a market basket of world currencies for at least 18 months and has experienced a free-fall since "the Bernank" announced "Quantitative Easing 2" (QE2) back in November. See http://www.forexblog.org/category/us-dollar for data.
So what does all this have to do with the price of oil and gasoline? A lot. Oil is bought and sold on world markets using the dollar. It is the official currency of oil trading. We typically think of the prices of crude oil and therefore gasoline as being the result of direct changes in the supply and demand for oil. If the supply increases (or demand falls) — for example, if OPEC increases its production quotas — we expect the price of oil to decline. If the supply falls (or demand increases), we expect the price of oil to rise. So when we turn on the news or listen to pundits talking about the price of gasoline, we see finger-pointing at particular demons whose activities directly impact the supply and demand for oil; i.e., OPEC, domestic oil companies and refiners, speculators, etc.
Unfortunately, most of these pundits are ignoring the other side of the oil-for-dollars trade. Just as an increase in the quantity of oil decreases the value — i.e., price — of oil, an increase in the quantity of dollars decreases the value of dollars. On international oil markets, this means that more dollars are required to purchase the same amount of oil. Sellers of oil will demand more dollars for each barrel because the dollars they are receiving will buy them less in terms of other goods and services. As the Fed pursues a policy of keeping the value of the dollar low relative to other currencies, it is driving up the price of oil.
If President Obama is truly concerned about reducing oil prices, which for reasons discussed below I believe is not the case, he should stop pointing fingers at "speculators" or big oil companies or "evil" foreigners (the last also being the favorite target for Obama’s arch-enemy Donald Trump). Instead, he should take a look at the policies of his own Fed chairman, Ben Bernanke. While many on the right complain about China’s manipulation of the price of its currency on global markets, it is the Fed’s manipulation of the supply of dollars in order to drive the value of the dollar down on world markets that is responsible for the prices of oil and gasoline being as high as they are.
We should not assume that the President is ignoring the role of the Fed in all this because he is ignorant of these basic economic relationships. Instead, I believe that Bernanke is actually doing Obama’s bidding in pursing a cheap-dollar, expensive-oil policy. It is not news to point out that Obama’s energy secretary Steven Chu has infamously said that he would like to see Americans paying European prices (i.e., $5, $6, or $7 a gallon) for gasoline. Indeed, global-warming alarmists, President Obama included, strongly believe that the use of gasoline is destroying the planet. High gasoline taxes in order to "nudge" people to decreases their usage have been a part of their agenda for decades.
Bernanke’s policy is this gasoline tax. In fact, from a political perspective, it is better than an outright tax because it is hidden. It has all the impact of a tax on people’s lifestyles and choices without any of the transparency that would come with a direct tax. Furthermore, it can be continuously raised without any legislative action. Every time the Fed acts to expand the money supply, driving down even further the value of the dollar, the gasoline tax goes up. It is the perfect policy for those who desire high gas prices but do not want to take political responsibility for them. False demons can be used as political targets for mudslinging and stoning while the true culprits, Ben Bernanke and his cronies at the Fed, get away scot-free.
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