Babeled

Congress is once again trying to utilize the private sector as a scapegoat for the undesirable effects of poor policy and governance. Today, Executives from five major energy companies were grilled by Congress amidst the clamor of the American public on rising oil prices. Unfortunately, given the tone I have been reading in mainstream media, it appears that the government’s spin is being picked up and reported as gospel. This is an attempt to acquiesce voters frustrated by the economic burdens being borne from near-sighted transportation, foreign, economic, and energy policies by the U.S.

How unbalanced does it get? Well, here is a handy quote lifted from CNN’s article on this topic, “Normal supply and demand says prices should be around $55 to $60 a barrel,” said Sen. Patrick Leahy, D-Vt., chairman of the committee. This is a statement (whose legitimacy must be questioned, first of all…) that is intended to generate controversy and ignores basic facts pertaining to the situation.

The price of oil, as with many commodities in the world, is determined by many factors. Supply and Demand, while this is probably one of the most, if not the most, important factor, it is certainly not the only factor. Senator Patrick Leahy, whether out of ignorance or more nefarious motivations, has misled a great many people with his statement above regarding the supply and demand price curve for oil. He is ignoring the following factors:

• International Currency Exchange Rates
• Refining Capacity
• Geo-political factors in oil producing or refining nations
• World Demand - U.S. Demand is not an accurate barometer for the rest of the world as we have remained fairly stable in terms of petroleum demand since the 1970’s and industrializing nations are increasing their demand at much higher rates than the U.S.
• Cost of discovery and drilling oil deposits that are becoming harder to find and more difficult to harvest
• Forced supply restrictions (not allowing drilling for oil to occur in certain areas with known deposits)

My problem with this little Congressional lynching of executives lies within the currency exchange rate factor. This factor has proven to be extremely significant to recent oil prices, whether the media reports it or not. The fact remains, oil uses the U.S. Dollar as its cost basis. This means if the value of the dollar increases versus other currencies, the relative price of oil (controlling for supply/demand price issues) goes up for other currencies and down for the U.S. Dollar. The inverse is also true. Which leads us to today, where the value of the U.S. Dollar is down against other major world currencies anywhere from 13% to 30% over the past five years.

If you were to take the current per barrel price of oil (as reported $132 per barrel on 5/21/08) and adjust the U.S. Dollar’s strength to the level it was at on June 30, 2003, the price per barrel of oil would range from $95 to $100. While this does not coincide with the $55 to $60 per barrel price indicated by Senator Leahy, it certainly does account for one half of the discrepancy between the market price and the theoretical price suggested.

I now ask, “Is it Big Oil’s fault that the value of the U.S. Dollar has been decreasing versus other major world currencies?” No. Why? Because exchange rates are mostly determined by import/export balances, and budget deficit/surplus. Who is in control of those factors? The U.S. government has more influence over these factors than anyone else. By balancing the budget and adjusting trade policies and tariffs, the U.S. government has the ability to strengthen the Dollar, thus immediately decreasing the per barrel cost of oil. Granted, imported oil is a big reason why the U.S. operates at such an enormous trade deficit figure; however, this is also partially under the control of the U.S. government, who repeatedly refuses to open known oil deposits for drilling based on fear and propaganda from twenty years ago when people were in a frenzy over oil spills. Less oil imported, smaller trade deficit, stronger dollar, lower cost of oil per barrel.

There are many other methodologies that can be employed by the government to reduce the trade deficit and balance the budget, but none of these issues appear to be garnering attention from our elected officials. An apathetic approach to the strength of the Dollar is what concerns me the most as this will have a great impact on the price of almost every product, not just oil. Our economic fundamentals need to be corrected before we can expect to see our markets handling price fluctuations for a commodity such as oil with any semblance of stability. Don’t let Congress pin the bad rap on someone else, make them take ownership for that which they have neglected and admit the failures and faults which have led us to this dire economic situation. And then make them work for our best interests instead of organizing committees to talk to baseball players about steroids and bashing U.S. corporations for doing what they do (you know, run a profitable business which employs thousands of our citizens and brings billions in tax revenue to governments).