In a recent post, I mentioned that the U.S. economy is highly energy-intensive. That is, the energy used to produce $1 of wealth in America can produce $2 in Germany and nearly $3 in Japan. So, all else being equal, high oil prices take a heavier toll on the U.S. economy than in more energy-efficient countries, simply because we need more energy to do business. (By the way, oil prices just bumped up past $50 a barrel.)
But there’s yet another reason why high oil prices hit harder in the States than elsewhere. On the global market, oil is priced in U.S. dollars. Obviously then, Americans feel every oscillation in prices because crude is denominated in the same currency as our paychecks. That’s not necessarily true in other countries.
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The dollar has been in a long-term slide against other major currencies including, most notably, the euro. Currently, a dollar buys only about 76 euro-cents. So markets have upped the price of oil (in dollars) to compensate for the greenback’s eroding value. That’s one reason why oil prices are rising.
Here’s a hypothetical, loosely based in reality. Imagine that in 2000, $1 = 1 euro and the price of oil is $40 a barrel. So Europeans pay 40 euros. But by 2005 the dollar slips to $1 = 0.8 euros. Now, if the price doesn’t change, Europeans can buy oil for just 32 euros a barrel. But the market adjusts to compensate for the anemic dollar and the price goes up to $50 a barrel. Now Europeans are paying 40 euros a barrel again, the same as before. But Americans are shelling out $50. (And the same thing happens for oil purchasers who use the yen or pound or any other currency that hasn’t weakened along with the dollar.)
So who is worse off? Americans. Obviously.
But it’s not at all obvious to Fox News commentator and perennial Europe-basher John Gibson, who today wrote:
If the slide of the dollar has reduced [oil’s] value about a third, that might mean the oil producers need to get another third if they’re getting dollars to make up for the slide. If that’s the case then the real price of oil is about a third less, which means it’s about 35 bucks a barrel in adjusted bucks. So who does this hurt most? People buying oil with expensive euros, that’s who.
Um, sorry John, but you got it exactly backwards. The people it hurts most are Americans.