The American Spectator

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OIL AND THE DOLLAR br> Re: Ralph R. Reiland's Over a Barrel : /p>

I enjoyed Ralph Reiland's article concerning the price of oil and what to do about it; however, he could have emphasized the role our Federal government plays in the mess. It is quite easy to track the value of the dollar the last 13 months as well as the price of oil on the same graph. The correlation is quite obvious. The dollar has lost about 50% of its May 2007 value. The price of crude in May 2007 averaged about $68/barrel. Today, it is almost twice that. Things really got worse when the Fed drastically reduced interest rates in order to head off a Wall Street meltdown. If one couples the rate cuts with the continued voracious appetite for deficit spending by Congress, and the uncertainty of a national election, it is no wonder the dollar has taken such a slide.

Another culprit is the Treasury. The Treasury could co-ordinate efforts with foreign banks to re-value the dollar. They could simply sell off Euros and Yens and buy up dollars. However, I get the feeling the Treasury will do no such thing. The weak dollar and low interest rates actually make congressional borrowing much easier. Finally, we cannot complain about sending billions of petro-dollars overseas when the Federal Government makes domestic drilling and exploration nearly impossible. Factor in the EPA mandates concerning summer time fuel blends, and the attendant price pressures these mandates create, and it is easy to figure why summer gas prices will approach $5 a gallon.

The last culprit in this saga is the commodity speculator. Many investors have been pouring large sums of cash into the commodities market as a hedge against a weak dollar. Oil is the king of commodities right now. Speculators will drive up the price of crude as far as the market will allow. Just as in the housing and dot com bubbles, late investors will be drawn to the rapid appreciation of commodities pushing the prices even higher. We are seeing the same thing with other commodities (especially corn, which is enjoying record prices thanks to government ethanol mandates).

My own prediction is simple. At some point the Fed must raise significantly raise interest rates. Inflation and a weak dollar are beginning to cause some serious problems in our economy. Wall Street's liquidity problem is about over, and there is no reason for interest rates to stay at 2%. Commodities are much more volatile than equities or real estate. When the Fed does decide to raise interest rates, the price of oil will fall. We are already seeing the markets react to high oil prices with falling demand. Once the price of oil begins falling, there will be an immediate worldwide sell off of oil futures and the price will plunge. Some poor speculator(s) will be holding a lot of oil he cannot sell.

p>The energy market is laden with government regulations and interference; there is no rational way for the industry to plan and react. In that case, the kind of volatility we've seen these last 12 months will continue. After falling, the price of oil could very easily return to 2008 levels. All it takes is more government "tweaking", or interest rate cuts. Eventually the voters will wake up to the fact that the energy problem at its heart is a problem of government interference. The only difference between now and 1979 is that the GOP is joined with the Democrats. br> -- JP br> Indiana /p> p>

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