There is a lot of concern regarding the current price of oil and it's related impact on the price of gasoline. While there is a general relationship between the two I would like to provide some insight as to a possible explanation of why the price of oil is going up. I hope this explanation is clear enough to see the relationship between the decline in the dollar and the increase in oil.
The following is an excerpt from Richard Russell's Dow Theory Letters*. The concept that one needs to come away with after reading this piece is that as the dollar has sunk to new lows, the value of dollars traded for the same amount of oil has decreased. Keep in mind that oil is traded on the international markets in US dollars.
The following is an excerpt from Richard Russell's Dow Theory Letters*. The concept that one needs to come away with after reading this piece is that as the dollar has sunk to new lows, the value of dollars traded for the same amount of oil has decreased. Keep in mind that oil is traded on the international markets in US dollars.
"THE PICTURE: The eyes of the financial world have been riveted on the economic disease of 1974, the 'energy crisis.' And why not? The oil (gasoline) shortage is aggravating, it’s visible, it’s caused by “foreigners,” It’s something we don’t have to feel guilty about, and it’s all so easy to comprehend.
My answer to this approach (as it has been all along) is that it’s bunk, pure bunk! The real economic disease which has been eating away at this nation (and the world) is inflation, the systematic destruction of the Free World’s currencies. It started in the1950’s, increased during the 1960’s, and is now reaching crescendo proportions. Gold is the real value by which paper (fiat) money is measured, and the increasing number of dollars, pasetas, francs, marks, etc. which it takes each month to purchase an ounce of gold testify to the demise of the world’s paper currencies,
What has the oil crisis got to do with that? Not very much. True, the oil crisis did intensify the interest in gold but for one main reason. And the reason is the same inflation.
The Arabs are taking in (and holding) billions of dollars, dollars received for their oil. Those dollars have been hit by two devaluations and a steady torrent of inflation. So the Arabs said, “less oil and at higher prices." And they dovetailed with the Israel-Arab War into their 'inflation solution' with consummate skill. Meanwhile, the various governments continue to pour gasoline on the inflationary flames and it continues to take more dollars or pounds or marks or yens to purchase an ounce of gold."
*Russell, Richard. Dow Theory Letters. February 27, 1974. Issue 590. page 1.
Now, in order to offset the loss associated with the decline in dollars, oil producing nations need to reduce the amount of oil they sell on the open market in order to receive the equivalent worth that their product normally sells for. Another possibility, however unlikely, would be that the US dollar increases in value in an extraordinarily short period of time to blunt the effect of dollars for oil.
With all the global demand that currently exists, Saudi Arabia and other oil producing nations don't really need to decrease production as much as they just need to keep output at a lower rate of increase. This also explains why President Bush's request for increased production was rebuffed by the Saudi government. The Saudis want their money's worth and aren't going to placate the demands of a lame duck administration. Touc.
My answer to this approach (as it has been all along) is that it’s bunk, pure bunk! The real economic disease which has been eating away at this nation (and the world) is inflation, the systematic destruction of the Free World’s currencies. It started in the1950’s, increased during the 1960’s, and is now reaching crescendo proportions. Gold is the real value by which paper (fiat) money is measured, and the increasing number of dollars, pasetas, francs, marks, etc. which it takes each month to purchase an ounce of gold testify to the demise of the world’s paper currencies,
What has the oil crisis got to do with that? Not very much. True, the oil crisis did intensify the interest in gold but for one main reason. And the reason is the same inflation.
The Arabs are taking in (and holding) billions of dollars, dollars received for their oil. Those dollars have been hit by two devaluations and a steady torrent of inflation. So the Arabs said, “less oil and at higher prices." And they dovetailed with the Israel-Arab War into their 'inflation solution' with consummate skill. Meanwhile, the various governments continue to pour gasoline on the inflationary flames and it continues to take more dollars or pounds or marks or yens to purchase an ounce of gold."
*Russell, Richard. Dow Theory Letters. February 27, 1974. Issue 590. page 1.
Now, in order to offset the loss associated with the decline in dollars, oil producing nations need to reduce the amount of oil they sell on the open market in order to receive the equivalent worth that their product normally sells for. Another possibility, however unlikely, would be that the US dollar increases in value in an extraordinarily short period of time to blunt the effect of dollars for oil.
With all the global demand that currently exists, Saudi Arabia and other oil producing nations don't really need to decrease production as much as they just need to keep output at a lower rate of increase. This also explains why President Bush's request for increased production was rebuffed by the Saudi government. The Saudis want their money's worth and aren't going to placate the demands of a lame duck administration. Touc.
