Overlooked factor in oil hike: falling dollar

Gasoline and heating-oil prices in the US are at an all-time high and rising. But it may surprise Americans to learn that in Europe, they've essentially remained steady. Why the cost difference?

Experts have a lot of good reasons to explain it, among them unrest in the Middle East, gas-guzzling cars, and greed among oil-producing nations. But there is another culprit that is being ignored and that is making the problem far, far worse in the US: the decline in the value of the dollar.

Between the end of February 2002 and the end of February 2004, the price of oil in dollars rose by 51 percent (from $20 a barrel in 2002 to more than $35 a barrel today), but it rose by only 4 percent in euros. Over the same two-year period, the US currency plunged from 1.16 euros per dollar to 0.80 euros per dollar. In this situation, it is perfectly rational for foreign suppliers of oil to charge more dollars.

While remedies such as encouraging more efficient use of energy are good, they won't negate the fact that a declining US dollar is an important cause of the run-up in oil prices. And the Bush administration is doing little about it.

It may seem like a stretch to blame the price of oil on fiscal mismanagement, but the rise is closely tied to the falling dollar, which, in turn, is the result of flagging confidence in federal tax and budget policies. The dollar is falling, among other reasons, because of the prospect of too many US Treasury bonds on the market - and that is made necessary by the enormous deficits generated by tax cuts, spending increases, and sluggish economic performance.

Thanks to the unbalanced policies of the past few years, the US will be pumping out trillions of dollars in new federal debt. Financial markets - and oil producers - are afraid that a future glut of bonds will drive down their value and, sooner or later, drive up US interest rates. The prospects of falling Treasury bond prices and a weak dollar have depressed European demand for US Treasury bonds, so the value of the euro has risen further relative to the dollar.

Dollars today simply do not possess the same purchasing power that they did a few years ago - a situation that will persist as long as it is painfully obvious that the administration has no plan to reduce the deficit. As the value of the dollar falls, of course, OPEC raises the dollar price of oil.

So as Americans flinch when they pump ever more expensive fuel into their tanks, they might reflect on the decline in international confidence in the dollar. It is more proof of the adage, "there's no such thing as a free lunch." In terms of today's relationship between the weak dollar and oil prices, the political version of a free lunch is a buffet of tax cuts, big deficits, high gasoline prices, and blameless officials.

Officeholders can claim credit for cutting taxes while blaming mysterious international market forces for increases in oil prices - but the bill still must be paid.

Richard C. Leone is president of the New York-based Century Foundation, where Bernard Wasow is a senior fellow. This commentary originally appeared in The Los Angeles Times. ©2004 The Los Angeles Times.

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