Kenneth B. Medlock III/ Baker Institute
Oil prices are trading near $80 again, buoyed by a U.S. stock market that appears to point to an economic recovery that would get people back in their cars. No matter that gasoline demand typically falls this time of year or that global oil markets still appear extensively oversupplied. Analysts are crediting everything from the possibility that trucks would deliver Christmas gifts soon to strong Chinese trade data.
But the real star of the show is the dollar which has been plunging of late, triggering financial players to make new bets on oil. Combined with expectations that the Obama administration won’t get around to regulating oil futures markets, oil once again seems to be an investor’s darling. But at what cost to the rest of us?
The dark reality that the fates of the dollar and oil are inversely and inexorably linked seems grounded in fact.
Baker Institute analysis of dollar-oil price data in recent years shows a dramatic change in price correlation from historical patterns. As the charts above of the daily oil price and the daily value of the dollar against the currencies of major U.S. trading partners show (click here for an expanded view), for the period from January 2001 through August 2009, these two measures are very highly correlated, exhibiting a high inverse correlation of -0.82. This compares with January 1986 though December 2000 when there was virtually no correlation (-0.08). In a nutshell, depreciation of the dollar was accompanied by a rise in oil prices in early 2008 and again this year, and then appreciation of the dollar a few months ago was similarly accompanied by decreasing oil prices.
Gulf Arab oil producers are starting to recognize this problem, debating whether in the future, extra oil exports will have to be accompanied by purchases of the dollar when and if they decide on the goal to lower global oil prices significantly.
But the Obama administration also needs to get on board and focus on how dangerous the oil-dollar speculation link really can be. The problem is its self-perpetuating nature, where the dollar risks getting caught in a vicious cycle where continually rising oil prices feed the U.S. trade deficit, leading to increased U.S. indebtedness and thereby an even weaker dollar, which further drives oil prices higher.
And therein lies the rub. We don’t know who is driving this trading strategy. Is it random traders and our pension funds? Or is it veiled sovereign wealth funds of groups hostile to the United States? Or perhaps, even more biting, is it your and my bank using our tax bailout dollars to speculate against our economic interests (and raising our gasoline prices at the pump at the same time in a double whammy)?
I don’t know about you, but I, for one, want to know.
And I am tired of hearing that my congressman is meeting with Wall Street lobbyists instead of me. Worst still, the “socialist” Democrats who are supposed to be so “regulation-oriented” are holding a $15,000-a-plate dinner this week in New York with President Obama as keynote. Who is attending? Probably the very people trading oil against the dollar. So next time you want to blame someone for the high price of gasoline, don’t be calling out Big Oil. Obama isn’t holding any $15,000-a-plate dinners here in Houston.
My bank should be required to report its oil-dollar trading on its balance sheet so I can make my own judgment where to rest my savings (read: not in a risky bank that speculates in oil). And equally importantly, our national security apparatus should be lobbying Capitol Hill to impose position limits and transparency rules to prevent our enemies (say, Russia, Iran or al-Qaida, as a few examples) from surreptitiously trading against our economy. And if the U.K. is really our ally and wants to see us have a CO2 market because of their “deep concern” about global warming, they ought to first do something to prove they don’t intend to kill off our economy just for the profits of moving financial trading dollars to London.
So while I cannot tell you exactly whose money is about to squash the economic recovery through the same kind of speculation that put millions of Americans out of their homes, I can tell you that you should care, big time.
And, so should the Gulf Arabs with all that oil under the ground. Mark my words. If the price of gasoline goes up again for no reason, Americans will not only get back out of their cars again, they might just back administration efforts to make lower gasoline usage permanent.
Amy Myers Jaffe is the Baker Institute Wallace S. Wilson Fellow in Energy Studies and director of the Energy Forum.