Quote:
Originally Posted by cfg83
The 45% drop in the value of the dollar is within range of your statement. However, the 650% increase in the price of a barrel of oil is in conflict.
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Ah, yes...the famous 650% number. I've seen that article before - it is often quoted to show that the dollar devaluation cannot be the real cause of the high price of oil. I don't blame you for being fooled - it is very, very good spin. As I said, almost all articles of this kind are politically motivated and that one is no exception.
Here is the problem: The writer incorrectly compares a linear scale (1.12 EUR/USD decreasing to 0.62 EUR/USD) to a logarithmic scale (percent price increase of oil). For example, if today the dollar were to drop 6 cents (10%) in value, oil would increase 10%, or a whopping $13 per barrel, but in 2002 that would have only been $2.20. Now the tricky part - because that $13 is 65% of the original $22/barrel price, the writer would say the price of oil has now increased to 715% (650% + 65%) over the original price! So the writer exponentially increases the "percent increase in oil" price while only decreasing the value of the dollar in a linear fashion. I'm not sure I explained that very well, but I hope you are having an "a-ha!" moment.
To anyone with a political motivation to decouple the devaluation of the dollar from the increase in the price of oil the really great thing about this way to calculate the relationship is that the higher the price of oil goes the less it
looks like the devaluation of the dollar is the culprit! It's prime, grade-A spin, and many people have been fooled by this particular mathematical slight of hand.
Quote:
Originally Posted by cfg83
Question: By your math, I think a barrel of oil would only be in the range of $50 to $60 a barrel ($40 to account for the weaker dollar and another $10-$20 for world instability). Why has it recently peaked well over twice that?
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No real conflict, I think. It is wrong to make long-term trend assumptions from short-term data. For short periods of time things like wars, hurricanes, etc have huge price effects. Looking at $138/barrel oil for the past few months is like yelling "I'm getting 138 MPG on my aeromod! But of course you get to the bottom of the hill and it all evens out. Because of the banking crisis over the past year all markets have been very volitile, including oil. This is a very noisy period and we will have to wait to see how it all averages out.