John Tamny at National Review Online talks about why oil prices are so high. He notes that the price is a function not only of increased demand but even more importantly, the falling value of the dollar. Since the barrel price of oil is pegged to the dollar, oil producers' profits suffer when the value of the dollar sags. In order to keep their profit margins up as the worth of the dollar sinks, producers charge more for the oil they sell.
Tamny asserts that the problem actually began back in the 70's when President Nixon took the dollar off the gold standard and set it afloat, a point that Bill () has emphasized in his posts here at Viewpoint on numerous occasions.
Tamney says:
Since oil is priced in dollars, it was only natural that the oil price rose substantially in the 1970s. Early in that decade, oil "shocks" were a U.S. phenomenon related to the Federal Reserve's failure to maintain dollar stability, and a world phenomenon to the extent that other currencies followed the dollar's inflationary descent.
The reason why oil producers were far more able to meet economic growth with supply between 1947 and 1967 has to do with the U.S. monetary regime at the time and the fact that the dollar was fixed at $35 an ounce of gold due to the Bretton Woods agreement.
Producers could drill for oil during the Bretton Woods era highly confident that they would receive $2.50 a barrel. As evidenced by the fluctuating oil price since 1971, the floating dollar has introduced major instability that made occasional shortages and gluts inevitable. Oil hit a low of $10 a barrel in 1998, and that low price goes far in explaining why today's price has risen across all currencies.
What is needed is a commitment on the part of the Greenspan Fed to dollar stability, ideally in terms of gold. A message like this would give oil producers the confidence to make up for any shortfalls with new supply. As economists Peter Huber and Mark Mills note in their latest book, The Bottomless Well, we're not running out of oil.
This last assertion is interesting. If it's true that shortfalls in oil availability are not the consequence of limited supply in the ground, then they're obviously the result of factors like manipulation of supply or, less insidiously, limited drilling or refining capabilities. We haven't built a new refinery in twenty years in this country, and we're told that our present capacity can't keep up with the demand. We might ask our profit besotted oil executives why they haven't plowed some of their enormous cash harvests from the last two decades back into production enhancement. Or is that a silly question?
