02 Sep 2008

Good News on Oil and the US Dollar?

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Driven in part by the lack of major damage due to Gustav, oil prices have fallen to a five-month low, with the near-term futures trading at $109.25. At the same time, the US dollar has risen to a 10.5-month high, with the euro slipping below $1.45.

Oil prices, quoted in dollars, are closely connected with the US dollar’s fortunes on the foreign exchanges. Oil producers can sell their product to any number of nations around the world, and so if the USD falls against the euro, for example, then the dollar-price of oil needs to rise. (If it didn’t, oil producers would stop selling to American buyers and focus on European buyers.)

So the fact that oil is a very fungible, highly traded commodity ensures a close connection between its price, and that of the US dollar.

On the other hand, the two really are different goods. After all, there are days when some commodities are up, and others are down. And everything I said about oil in the above, could just as well be said of gold producers selling to a world market.

I will elaborate on my reasons in the coming weeks, but for now I will say that I think the “real” price of oil may continue falling, especially if worldwide recession dampens demand, and most especially if there are relaxations of the federal moratorium on offshore drilling in the US. (On the other hand, carbon legislation–promised by both McCain and Obama–would tend to raise the price of oil and other energy sources.)

But I am still very pessimistic about the fate of the US dollar. I still expect high rates of domestic price inflation in the next 12 months, and depreciation on the foreign exchanges.

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