Friday, June 6, 2008

Oil prices rise by $10-plus today: why is oil still priced in dollars?


Crude oil prices rose today by a record $10.75 a barrel, to $138.54, after reaching $139.12.

What were the factors? One was a reported threat from Israel to attack Iran if Iran doesn’t discontinue its nuclear program. It’s unclear what was said and it sounds irresponsible. The Palestinian situation has always sounded very strange to libertarian thought: property was taken from individual Palestinians over decades to reconcile a historical tragedy for a whole group of people. It is religious and historical groupthink v. individual rights. As long as this continues, oil supplies from the region will be subject to disruption.

Another factor was simply that Morgan Stanley predicted a price of $150 by July 4, not Dec. 31. Still another was comments about the falling dollar from the European Central Bank. Furthermore, the Federal Reserve is caught behind a rock and a hard place on the “stagflation” problem. Stimulation with lower interest rates to help alleviate unemployment leads to a weaker dollar, still.

On the other hand, George Soros and others have said that commodity prices may be in a bubble, and lack of oversight by regulators is a problem.

I wonder why oil is not priced in a more stable currency, which right now is the Euro. Or why not price it against gold directly? I never see any discussion of this, and would welcome comments from someone who could explain.

The underlying problem, particularly when oil is priced in dollars, is that America has not convinced investors that it can replace a large enough part of the oil infrastructure with other fuels to seriously reduce demand and reduce the political leverage of the “oil weapon”. The combinations include wind, solar, biofuels, and Western coal (which could replace petroleum for some airline fuels). And investors don’t even seem to be thinking about global warming yet when they buy oil futures.

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