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The Dollar Factor (John Tamny, 06/14/2004, Tech Central Station)

The recent spike in oil prices has predictably led to lots of finger pointing as to the cause. China, just six months ago thought to be the source of falling prices around the world, is now miraculously being blamed for higher prices, too.

USA Today's editorial page cites "spectacular growth in emerging markets, particularly China," in explaining expensive gas prices, as does the International Energy Agency ("the 'China factor" has more bearing on oil prices than any 'risk factor'"), and Naomi Fink of BNP Paribas who says "we are seeing demand-driven price increases."

The above reasoning might surprise consumers in Europe and Japan. Indeed, according to Trend Macrolytics chief economist Donald Luskin, the Euro price of oil greatly resembles the one from 15 months ago. Boston-based H.C. Wainwright Economics has done a similar study, and it turns out the Yen price of oil from 15 months ago is actually higher than today's.

Since there's no evidence that Japan and Europe are sold oil at massive discounts to the U.S. dollar price, the explanation for rising prices in the U.S. logically cannot be China. The answer is pretty simple though, and would be especially obvious to those who have watched the dollar's fall against the Euro and Yen over the last couple of years. This isn't to say that demand plays no factor in the oil price, just that it is small compared to local currency effects.

If true that's one thing the Fed's rate hikes will take care of, though if they overdo it they'll also lower our growth rate to Euro levels with catastrophic global effects.

Posted by Orrin Judd at June 15, 2004 7:38 AM