oil, gold, exchange rates, and inflation
February 3rd, 2008 by Dylan
A while ago I mused about the rising price of gas. In the wake of the recent, dramatic 1.25% interest rate cuts, and the awesome campaign of Ron Paul, I started to wonder if there was a correlation between the devaluation of the dollar, inflation, the price of gold, and the price of oil.
It’s not easy to find great data, but I did find some rough numbers to work with from various online sources:
| Year | $:£ Exchange | $/Gallon oil | $/Ounce of gold |
| 2000 | $1.52 | $27.39 | $280.10 |
| 2001 | $1.44 | $23.00 | $272.22 |
| 2002 | $1.50 | $22.81 | $311.33 |
| 2003 | $1.64 | $27.69 | $364.80 |
| 2004 | $1.83 | $37.66 | $410.52 |
| 2005 | $1.82 | $50.04 | $446.00 |
| 2006 | $1.84 | $58.30 | $610.00 |
| 2007 | $2.00 | $64.20 | $696.00 |
| Feb 08 | $1.96 | $88.96 | $909.00 |
This is very inexact, ignores fees, commissions, assumes averaged costs, etc., but it still led to some interesting conclusions:
- A barrel of oil has risen from $27.39 in 2000 to $88.96 today (down from ~$100 earlier this year).
- If inflation was 5% per year, gas should be $38.54 per barrel today based on 2000 prices. Inflation has been reported as less than 5% over that time, but does not include the price of oil.
- If in 2000, you exchanged $68.65 for £, then today exchanged your £ back to $ and bought oil, you would save 23%, as you would now have $88.96 to buy a barrel of oil.
- If in 2000, you bought $27.39 in gold, you could sell it for $88.89, leaving you just $0.07 short in buying a barrel of oil!
The emphasis of the rising price of gas over the past 7 years has been that oil is a scarce commodity, and that the wars and turmoil in the middle east have led to a significant rise in price. What is not widely mentioned is that gold has kept pace with the rising price of oil! This makes me believe that the diminishing value of the dollar is the real reason for the increase in the cost of oil. European countries have done a better job by not printing money as aggressively as the US Federal Reserve, but nothing like the value of gold. Again, greatly oversimplified as I don’t have perfect data or time to research this, but it does enough to confirm my suspicions that things just weren’t adding up.
You may want to look a the following two articles:
http://www.marketwatch.com/news/story/oils-surge-centers-sliding-value/story.aspx?guid=%7BC39476EA-069F-4921-9BED-4BB134D0E6B0%7D
and
http://www.econbrowser.com/archives/2007/10/does_dollar_wea_1.html
I’m not so sure you can rely on gold here as a good comparative indicator with your weak dollar/high oil price comparison…. Gold is a traditional hedge against a weak dollar/bad economy, so it’s normal for it to go up as the dollar weakens. At this particular time, gold also has a supply issue because of the 1999 Washington Accords, which prevent governments from dumping large quantities of gold reserves on the market & increasing volatility. So, in my (non-expert) opinion, gold & oil matchup on having a low supply and a high price. Gold’s price is well-known to be tied to strength of the dollar. However, oil’s is not, despite being traded in dollars. Furthermore, the oil situation at the moment is very complex — you’ve got Russia cutting off supplies to Western Europe, trying to put in puppets in Ukraine, moving towards a monopoly situation, “appropriating” Shell’s giant oil facility, etc. The entire Iran/Iraq/USA situation. Heavy new demand from China & India. I think those factors are contributing more to the cost of oil than the weak dollar in the US (though I’m sure it contributes some)
The dollar’s fall, seems less related to oil and more related to fundamental economic problems in the US. Fairly extreme Monetarist economic policy in the US, to an extent never seen before (as you alluded to with the Fed printing up money left & right and eliminating the M3 measure), questionable large Bush tax cuts during “war” with an impending SS/Medicaire crisis beginning in less than 10 years, etc.
So, I’m not sure there is as much correlation as you might think… That said, obviously the price of oil has a large impact on the US economy as a whole … I’m specifically talking about weak-dollar-oil or weak-dollar-oil-gold.
Cheers,
Dylan
I should have also pointed out that, in addition to the significant demand from China/India/etc., there has been no corresponding increase in output from OPEC (who just said they won’t raise output levels now, since they’re expecting reduced demand soon). No real international pressure or US pressure on them to do so. Keeps the crude prices high. Exxon & co. profit-taking (while they still can), adds to it once it’s refined & distributed.
Dylan