Gasoline and heating oil prices in the U.S. are at an all-time high and rising. But it may surprise Americans to learn that in Europe, they've essentially remained steady. Because oil is oil wherever it's used, why the cost difference?
Experts have a lot of good reasons to explain why prices are going up at the moment: unrest in the Middle East, gas-guzzling cars and greed among the oil producing nations, among others. But there is another culprit that is being ignored and that is making the problem far, far worse in the U.S. than elsewhere: the decline in the value of the dollar.
Between the end of February 2002 and the end of February 2004, the price of oil in dollars rose by 51% (from $20 a barrel in 2002 to more than $35 a barrel today), but it rose by only 4% in euros. Over the same two-year period, the value of the dollar plunged from 1.16 euros per dollar to 0.80 euros per dollar. In this situation, it is perfectly rational for foreign suppliers of oil to charge more in dollars to make up for the falling value of our currency.
While remedies such as encouraging more efficient use of energy are good, they won't negate the fact that a declining U.S. dollar that's worth less in the international market is an important cause of the run-up in oil prices. And the Bush administration is doing little about it.
It may seem like a stretch to blame the price of oil on fiscal mismanagement, but the rising price of oil is closely tied to the falling dollar, which, in turn, is the result of flagging confidence in federal tax and budget policies. The dollar is falling, among other reasons, because of the prospect of too many U.S. Treasury bonds on the market -- and that is made necessary by the enormous deficits generated by tax cuts, increases in spending and sluggish economic performance.
Thanks to the unbalanced policies of the last few years, the U.S. will be pumping out trillions of dollars of new federal debt. Financial markets -- and oil producers -- are afraid that a future glut of bonds will drive down the value of these bonds and, sooner or later, drive up U.S. interest rates. The prospects of falling prices of Treasury bonds and a weak dollar have depressed European demand for U.S. Treasury bonds, so the value of the euro has further risen relative to the dollar.
Dollars today simply do not command the same purchasing power that they did a few years ago -- a situation that will persist as long as it is painfully obvious that the administration has no plan to reduce the deficit. As the value of the dollar falls, of course, OPEC raises the dollar price of oil.
So as we flinch when we pump ever more expensive fuel into our tanks, we might reflect on the decline in international confidence in the dollar. The value of the dollar depends on widespread trust that sanity will prevail in U.S. fiscal policy. The falling dollar bears silent witness to falling international confidence in U.S. policy.
None of this should be surprising. It is more proof of the adage that "there's no such thing as a free lunch," which means that some cost, somewhere, is incurred for every benefit. In terms of today's relationship between the weak dollar and oil prices, the political version of a free lunch is a buffet of tax cuts, big deficits, high gasoline prices and blameless officials.
Officeholders can claim credit for cutting taxes while blaming mysterious international market forces for the increases in oil prices -- but the bill still must be paid.
Richard C. Leone is president of the New York-based Century Foundation think tank, where Bernard Wasow is a senior fellow.