People will blame cartels and “Big Oil” for the rise
in oil prices. Somehow thinking that evil
corporations are conspiring against them. In the same
line, people will also wonder how is it the price of
oil keeps going up when the world’s largest economy
has stalled in terms of economic growth, which logic
would dictate would cause oil prices to go down. The
two are not unrelated.
The key thing is that in terms of the US dollar the
price of oil has skyrocketed. Compared to other
currencies the price of oil has not (and compared to
gold – remember that currency – oil has not even
changed in price in the past 4 years) This is proof
that the price of oil is going up not because of evil
oil companies or even is cartelling against us,
but rather the value of the dollar has been dropping,
losing its purchasing power and thus buying less oil.
The question of who to blame for high oil prices is
not “who is controlling the oil” but “who is
destroying the dollar.” And the answer is three;
1. Greedy, dumb, spoiled Americans that spent
themselves into oblivion by taking out home equity
loans with no ability to pay it back. If people don’t
pay back their debts, the currency will suffer. Just
like the debt defaults of , , ,
and so forth, when the people of these
countries (actually their governments) defaulted on
their debts, what was the value then of their
currency? The same applies here. You don’t pay back
your debts, nobody wants to invest in your country,
and so the value of your currency will plummet
relative to countries where people have more fiscal
2.The specter of recession directly affects the value
of the dollar in that the only thing that gives a
dollar value is the stuff you can buy with it. An
economy is not about how much money you make (the
government can print off money all it wants). An
economy is about how much stuff it can produce. Cars,
food, movies, cake, video games, planes, etc. In a
recession an economy “contracts” meaning it produces
less stuff. So with less stuff, but the same amount
of money (more when you consider the monetary moves
the Fed is making) your money becomes worth less.
3. And the final culprit to blame are those that blame
big oil, namely leftists ;P For what do they produce?
They protest. They campaign. They “bring awareness”
to the issues, but what do hard core activists really
produce? The answer is nothing. This wasted labor
does nothing to produce any goods or services that
have value. Taylor the American protesting Big Oil
(or CAFTA, or what have you) majoring in “peace
studies” is not going to produce anywhere near the
amount that Punjab or Khan is going to produce
programming code or developing a new computer. And in
doing so, does nothing to help contribute to the
purchasing power of the dollar.
So if you’re sick of high oil prices, how about you do
1. Pay off your debts. I had an ingenious idea about
making extra principal payments tax deductible.
2. Find a job and produce something of worth.
3. Quit protesting stuff you don't understand, drop
your major in philosophy, and get a degree in
accounting and start producing something of worth.
See? This economics stuff ain’t so hard.
Friday, February 29, 2008
How the Dollar Affects the Price of Oil
There was a chart in the WSJ yesterday and it’s important that you understand it.