The Observer Newspapers | U.S. Oil Prices Due to Bad Policy

July 11, 2008

U.S. Oil Prices Due to Bad Policy

To the editor:

I was quite sorry to read the content of your editorial ("Stop The Delusion About Oil," Close to Home, July 4) after the title had got my hopes up so high.

The current "oil crisis" is really about U.S. spending and economic policy, not about oil. Haven't heard any politicians talk about this recently, have you? Politicians don't want to talk about it because it is somewhat complex and not happy news for U.S. voters. It involves currency exchange rates and federal government spending on entitlements.

How can we be sure it is not about oil? Well, oil is one of the few products in the world that is priced in a non-native currency. For example, if you were to buy German steel, at some point your U.S. dollars are exchanged for German deutschmarks, which is the currency that German companies actually use to price German steel and that German companies use to pay German workers.

But if you were to buy Kuwaiti (or any OPEC) oil, no currency exchange would take place in that transaction—the stuff is denominated in U.S. dollars. Check any financial media Web site and it will show that the U.S. dollar exchange rate has gone down, down, down relative to every other major currency over many years. Plot the exchange rate against the rise in the price of oil and they are very similar, but is this a coincidence or are they related?

If oil were priced in some other currency—yen, for example—oil prices themselves would have changed little over recent years, but U.S. gas prices would still be very high now due to the U.S. dollar-yen exchange rate, or the price to buy oil in U.S. dollars.

This is indeed a U.S. macro economic crisis. So why have U.S. politicians and the media focused on oil prices instead? Certainly they are savvy enough to understand. Maybe it's partly because voters can easily grasp the link between oil prices and gas prices.

But mostly it's because telling the truth would mean telling U.S. citizens that the United States is set to spend far beyond its revenues (i.e., going broke, and in a hurry) due to many years of generous politicians and spending written into law.

Which elected official has the political will or is brave enough to start that conversation? A conversation which will surely be used as ammunition by his or her next election opponent where he or she will lose?

Yes, I agree with you, it is time to "Stop The Delusion About Oil" and start a substantive (though certainly less entertaining) discussion about long-term U.S. spending, economic policy, and economic security and the sacrifices it will require. It is only by making those tough choices that the U.S. can bring down oil prices.

Peter Westcott

Herndon