Driving towards bankruptcy

During the week ended June 27, oil prices hit a record high of $142 per barrel. With the continual increase in energy prices over the last two years, the question echoing through the halls of Congress these days is, “Who is to blame for high gas prices?” In typical Washington-knee-jerk-reaction-because-it’s-an-election-year fashion, Congress is looking everywhere for the evil culprit to punish so that the voters will feel like something has been done to alleviate consumer pain. Unfortunately, this type of short-term thinking is what got us here in the first place.

Instead of pursuing increased domestic fossil fuel, or providing incentives for Detroit to adhere to higher fuel efficiency standards, political authorities have tried to ignore issues related to energy policy until a crisis has reared its ugly head. Now, the failure to focus on sound policy is threatening our economic stability for years to come.

Because of the economic effect of rising oil prices, policy makers are hard-pressed to find a quick fix and one group that is getting thrown under the bus is “Speculators.” As if they were the mustachioed villain tying the damsel to the railroad tracks, some in Congress and the media have pointed out this group of commodity investors as a major influencer of oil prices. The thought is that these investors are bidding up oil prices by buying financial instruments based on the anticipated future price of oil. While these instruments do have some effect on commodity prices, to regulate these players out of the market would create an even more disastrous situation in which there was increased volatility in the price of commodities such as oil.

There is no doubt that the price of oil has had a significant negative effect on the U.S. economy. There seems to be little understanding in Washington though of the interlocking relationship between the value of the U.S. Dollar and the price of oil. As the prospect of a weaker U.S. economy is reflected in a declining Dollar, the price of Dollar-denominated oil goes up. As oil producing nations get paid in Dollars that are worth progressively less, they raise the price of the oil to offset the decline in value. Stemming the decline in the Dollar would have an immediate effect in stabilizing and lowering the price of oil.

The unfortunate truth in the Dollar’s decline is that it reflects the economic viewpoint of the world that our economy is relatively weaker and a major driver of this viewpoint is our national debt. As long as we continue to borrow from the rest of the world (ironically; in increasing amounts from oil producers like Saudi Arabia) to fund our government and its tendency toward legislative consumerism (increased spending to make all the constituents happy), our Dollar will continue to decline. As we approach the tipping point of baby-boomers collecting from welfare programs, the problem will only deepen. As a result, we will continue to see rising oil prices and an ongoing threat to our economy and our way of life unless our political leaders get the will to make the difficult decisions to stop spending frivolously and reform entitlement programs.

It is easy to find the election year boogie-man on Wall Street, but if our Congress would like to see who is at fault for higher oil prices, they should start by looking in the mirror.