Oil Continues to Rise Because the
Dollar Continues to Fall
March 1, 2012
(This item originally appeared at Forbes.com on March 1, 2012.)
http://www.forbes.com/sites/nathanlewis/2012/03/01/oil-continues-to-rise-because-the-dollar-continues-to-fall/
The primary reason that crude oil today – Brent is at $123 per
barrel – is higher than its prior average around $20 in the 1990s,
or the $3.00 of the 1960s, is that the dollar has lost value over
that time. It doesn’t have much to do with crude oil itself. Today,
an ounce of gold would buy about 14 barrels of oil. In the 1960s, it
would buy about twelve barrels.
In 1960 dollars, which were worth 1/35th of an ounce of gold as per
the Bretton Woods gold standard system, today’s oil would cost
$2.51. It appears that oil is actually cheaper today than it was in
the 1960s. In 1925 dollars, which were worth 1/20.67th of an ounce,
it would cost $1.48.
I’m not just hypothesizing. If you own a 1925 $20 Saint Gaudens gold
coin, a regular part of the U.S. currency system in those days, in
normal worn condition, you can actually trade it for about 14
barrels of oil today. The coin contains just short of an ounce of
gold.
I’m happy to report that many
people today are keenly aware of this notion. We have come a
long way from the 1970s era “running out of everything” silliness,
when oil’s rise from $3 to $40 was universally blamed on evil Arabs.
Actually, I give considerable credence to the “peak oil” theorists,
who argue that world oil production will begin to drop off in coming
years. This might become an issue in the future. However, the
gold:oil ratio today shows that it is not yet a major factor for
prices.
Oil takes on an outsized importance for a few reasons. Often, the
negative aspects of currency devaluation are not felt directly at
first. The currency might go from $1000/oz. of gold to $2000/oz. (a
50% devaluation), and it might feel great. The economy might have a
noticeable pickup, unemployment could decline, and stocks might
rise. With today’s level of general ignorance, nobody particularly
cares what the dollar/gold ratio is.
This is the effect much loved by the Keynesian money-manipulators,
which is why governments have experimented with manipulable floating
currencies for literally millennia.
The negative aspects of the devaluation are generally felt first in
commodities prices, and interest rates.
From this you might conclude that a government that wishes to engage
in an “easy money” monetary policy, of the sort that leads to a
decline in currency value, would take many steps to suppress the
negative effects of their policy, in commodity prices and interest
rates. Then, they would enjoy much of the apparent benefit (possibly
a more ebullient economy) without the apparent disadvantages. In
Nixon’s day, this was done with price controls. Things are a little
more subtle today, although you could call the Fed’s action in the
U.S. Treasury market to be akin to price controls.
Most people don’t feel “commodity prices” directly. When was the
last time you bought bulk copper? Even foodstuffs, like wheat, are
generally not purchased in that form by citizens. They go into
processed foods like breakfast cereal. (People in emerging markets
have a more direct relationship, as much of their diet can consist
of cornmeal, plain flour and cooking oil.)
I think we have all been noticing the rising prices and shrinking
package size in the supermarket. However, it is hard to have a
discussion about it. The price of Wheaties is not enough of a shared
experience, and too variable due to all sorts of extraneous factors,
to be used as a benchmark for anything.
Thus, our political discussions tend to focus on that one commodity
that we all use daily, and which is standardized across the country
– gasoline. This serves as a proxy for all of our commodity-related
expenses such as food and fuel, and, as the effects of currency
devaluation spread, rising prices for all sorts of goods and
services.
The fact of the matter is, currency devaluation makes people poorer.
If a currency declines in value by 50%, and your wages do not rise
by a corresponding 100%, then you are obviously getting paid less.
However, it is usually not so apparent at first that this is the
case. The way in which we get poorer is by rising prices such as
those for gasoline, and a broad economic deterioration which is
quite difficult to put your finger on exactly. It is obvious to
anyone with their eyes open, though. Just compare New York in the
1960s (think of Audrey Hepburn in “Breakfast at Tiffany’s”) to the
New York of 1980, when SoHo was a slum. Think of what cars looked
like in 1965, compared to 1981.
People generally don’t complain about “rising prices,” when the
reason for the rise is not currency devaluation, but rather the
increasing prosperity and wealth of a country. People as a whole
know that they are being slowly devalued into poverty by the Federal
Reserve’s “easy money” policy. However, this topic is much too
complex for most individuals, so they focus on something – gas
prices – which seems more direct.
Before this is all over, I expect to see oil prices north of $1000
per barrel – perhaps in 5-8 years.
Our four-decade experiment with funny money, since leaving the gold
standard in 1971, is producing all the expected results. It will
probably get worse. Ideally, we will rediscover why the Founding
Fathers of this country insisted that the currency be linked to
gold. The U.S. followed that policy for 182 years, and became the
wealthiest and most influential country in the world.
Stable money works. The floating currency experiment will eventually
be revealed for what it is: smoke and mirrors, obfuscating our long
downward trek into poverty.
