[Concerned1]

Do you want to know why the price of oil is going up? Well, at least it was until a few days ago, but that's another matter. Oil is going up because the dollar is falling. Simple as that. Yes, there are other smaller factors, but the falling value of the dollar is the overriding cause.

Does anyone think it's just a coincidence that the price of oil began it's abrupt rise just when the dollar began to precipitous decline? If you had a lemonaid stand and the people who used to buy a cup of your lemonaid for $1.00 are now offering you only 50 cents, would you accept that? Neither are the OPEC countries. Because that's essentially what we're asking them to do since the dollar has fallen in value. If we're not willing to adjust what we pay to make up for that decline, were asking them take a drastic cut for something they used to get substantially more for. They'll be damned if they're going to take 50 cents for something they used to get for a dollar.

Why the sudden decline in the dollar? Because of the 'Mortgage Meltdown'. In 2003, interest rates for home loans fell to something like a 40 year low. The lure of the tens of thousands of dollars (and more depending on the size of the loan) that could be saved on those loans was overwhelming to countless homebuyers. While most still continue making their payments as usual, a huge number discovered later that they couldn't. That, coupled with a lot of shady real estate deals deliberately made to poor quality applicants in the hopes of reaquiring those homes down the line, led to the enormous defaults in loan payments to the tune of hundreds of billions of dollars.

The loss of all that capital was such that has nearly depleted the federal reserve as it has attempted to shore up the many lending companies teetering on the edge of bankruptcy. And where does the fed get all that money? They're printing it. Since we abandoned the Gold Standard (meaning a dollar is worth a comparable amount of gold) in 1971, there is nothing that actually backs the dollar but the good faith promise of the government to make good on its loans. That's been a promise that they have been able to keep with an aggressive tax agency. But the sheer number of defaults has overwhelmed the government and it's left with no choice but to print more money to cover those defaults. Every time we print more money, we lower the value of the dollar by a cooresponding amount.

Thus, the falling value of the dollar. If it's worth only half today of what it was 5 years ago (and I'm just throwing out a number here) then we're essentially asking OPEC to accept half of what we used to pay for the same amount of oil. Obviously, that's not going to happen. Thus the increase in the price at the pump. Raise the value of the dollar and the price of oil will fall.

I think something else ought to be said about the huge number of defaults on home loans. Yes, many homebuyers simply got in over their heads, were tricked by some lenders or just got a little greedy. But many of these defaults are from people who've just decided that they don't want to pay for those loans, especially when they hear that bailouts are coming. I mean, why would John continue to pay $300,000 for a loan on a home that's now worth only $200,000 when Stacy across the street hasn't made a payment in over 3 months because she thinks the fed is going to substantially lower her payments? C'mon.

[Jotapay]

You are part right (and the correct part is a small minority). Good freshman attempt.

[Twilight]

The falling dollar is a relatively small part of the oil price picture. It does not explain most of the run-up from $20 to $140. Costs of production have increased as new projects have tended to be more and more technically challenging, consequently also yielding a smaller net energy reward. Global demand has increased. So have competing consumers' budgets. Demand might be starting to be destroyed at the margins, but overall they are able and willing to bid higher than before. Oil has become affordable to people who had not previously enjoyed access. Exporting countries' domestic demand has risen dramatically in many cases, reducing volumes available for export or at least restraining export growth. The declining quality of crude is also important, not every refinery can refine every kind of oil, so some commands a premium and the heavily contaminated stuff can wait weeks to find a buyer with the right equipment. There is more. I could list more reasons but I could never list them all, and we could all debate the relative importance of each. The credit crisis is just another layer. The real truth is we physically cannot produce the volume and quality of oil we want at a price we like. If you want the good stuff, you have to pay more than the next guy.

[MD]

The Simple Truth:

1. Just a few aging super giant oil fields produce a quarter of our sweet light crude.

See the bottom two segments of the chart? That's the cheap stuff, and it's going away at an accelerating rate. We have to go up-pyramid to find new supplies and guess what? It takes energy to bring that stuff into production. Oh, and don't forget; the vast majority of new production won't have as much gasoline content.



Read Simmons report on giant oil fields here for more info.

Read Frederik Robelius's report here.

It's should be crystal clear that massive and long-term capital investments will be required by the energy sector to replace this depleted production! Google "orders of magnitude".

And if you've been paying attention, you will realize that turning all of this capital investment in new energy supplies will require massive amounts of energy! Wiki "ERoEI"

2. OPEC lied to each other and to us. Google it and learn.

[Mettezz]

Your logic fails big time, if the only reason is the decline of the dollar why do oil prices go up in Euro's, Yuan, Yen ... also then huh?

[chrispi]

Nice to see that I'm not the only one who spotted the Yankoslavian Dinar's falling as the cause of this current crisis, not PO.

[MrBill]

You are part right (and the correct part is a small minority). Good freshman attempt.

You're right. But more of a C than an A+. Oil prices are rising in ALL currencies, so it is not just US dollar weakness.

Inflation and Money Supply

Commodity Prices and Money Supply

Ag Commodity Prices and Money Supply

Crude Prices and Money Supply

Commodity and Energy Prices

Sorry for the links, but the images themselves are too big and they distort the screen. Click on enlarge image for best results. They clearly show that energy and commodity prices has far surpassed any US dollar weakness. Although certainly a weaker US dollar is a contributing factor!

[idiom]

The Conflation of these two issues is what will kick us in the balls.

The Government and the Fed being politically expedient with the money supply will cause the depression.

Peak Oil will stop us from ever recovering from it.

The Conflation of the two issues is what will stop us seeing Peak Oil coming down the tracks to flatten us. Peak Oil is real, even though a lot of Oil rise is being caused by inflation right now. This very mechanism of negating PO because of a lot of valid Inflation fault is the actual problem with Peak Oil. Nobody will see it because it causes so many other problems.

[kublikhan]

Most other posters already said it. But dollar weakness and supply and demand fundamentals together are kicking oil higher.