What the World Doesn’t Understand About Oil Prices

Every morning as I drive to work, I listen to the same radio station… the only one that gives business news in my area. Since I’m an earlier riser, I get to hear the financial news before the newspapers arrive at the office and before I get a chance to log on to the Internet.

The particular station I listen to reports on oil prices every morning. And, as we all know, oil prices are approaching the $100.00 U.S. per barrel level, as I had predicted a couple of years ago. The radio announcer talks the talk of “can you believe it” as oil for December delivery passed $96.00 U.S. per barrel that morning.

But what the radio announcer and the majority of the public fail to realize is that oil is hitting record price highs only when denominated in American dollars. If we look at gold in euros or pounds, oil has not gone up that much over the past couple of years. And if we price crude oil in gold bullion, the price of oil has actually gone down over the past 24 months.

Oil denominated in U.S. dollars has gone up because U.S. dollars are worth less today (compared to other world currencies) than they have been in the past 15 or so years.

It’s all quite simple. The U.S. dollar is down in value, so the major producers of crude oil (Venezuela, Middle East) want more U.S. dollars for each barrel of oil they make.

My big question is: at what point do oil producers start wanting euros, pounds, yen or maybe even gold bullion, for the crude they produce? If the U.S. dollar continues its fall against other world currencies, the day when major crude oil producers demand something other than U.S. dollars for their production will not be far off. That’s when Americans will really start to panic about the cost of filling their cars with gas.