Wednesday, May 27, 2009

... Or, Why is Oil So Damn Expensive?

What the average American knows about economics would fit on a postage stamp. They blame Big Oil for the spike in the price of gas, or the nebulous speculators. The truth is a bit more complicated. The Associated Press: Meltdown 101: Why is the dollar weakening?

So far this year, the dollar has fallen 10% since March. It actually gained late last year, as investors worried about every country, and bought dollars - mostly on reflex.
But as the months wore on and the Treasury Department continued to issue record amounts of government bonds into the market to finance its stimulus and bailout packages, the dollar has become less and less attractive to investors. The U.S. budget is expected to hit a record high of $1.84 trillion this year.

A poor economy and high debt weaken a country's currency because investors decide that they're better off buying bonds, stocks and other assets in countries with stronger economies and more stable debt. Stronger countries' assets — and, thus, the currencies those countries use to value their assets — are more likely to rise in value, and their debt is less likely to default.
So the price of oil: Some of the rise is attributable to an increase in demand. (Go count the trucks on the highway. The number is still down from last year, but up from December) But a part of it is due to the decline in the dollar. Each dollar buys a little bit less. Everything is a bit more expensive. And yes, some of it is the fault of those eeeeevil speculators. They are usually known as investors, and when did it become a bad thing to make a buck in the markets? Everyone was doing it - or trying to - in the late 90s. People are buying gold. Are they eeeevil speculators? Probably.

And some of those people hedging their bets against future high oil prices are airlines and trucking companies. Futures contracts do eventually come due. You do have to buy the oil if you said you would. (Options are another matter.)

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