From SCDigest's On-Target E-Magazine
April 27, 2011
Logistics News: Behind Rising Oil Prices, Everything but Supply and Demand
Speculation Adding 20% to Cost, Goldman Sachs Says, but That is Connected Directly to Falling Value of the US Dollar
SCDigest Editorial Staff
A funny thing happened on the way to the price per barrel of oil soaring past $110 recently: it has little to do with supply and demand.
Oil prices have spiked in the last six months, up some 22% in 2011 alone, causing pain in corporations and households alike. Diesel fuel prices have risen to over $4.00 per gallon in most areas of the US, up more than $1.00 from a year ago. Rising oil prices not only hit the cost of transportation, but the price of many purchased inputs that are themselves impacted by rising oil and transportation costs.
SCDigest Says: |
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| The impact of speculation cannot be understood without understanding the role of the value of the US dollar...For the past six months or so, the value of the US dollar has been falling significantly against most major currencies |
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What Do You Say?
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But as many commentators have noted, the market equilibrium for oil has not reallychanged over the past year. The world is still producing about 86 million barrels of oil per day. The balance of demand and supply saw little or no change during this huge price run up, and interestingly the world has thus far seen little of the "demand destruction" most expected as the cost of oil ran up over $100.00.
So, what going on? Well, as in the last oil price explosion, "speculation" by oil traders is blamed, but maybe with even greater validity today.
A recent report by the analysts at Goldman Sachs said that as much as 20% of the current price of oil - or around $20.00 per barrel - might be attributable to the role of speculation and oil futures rather than marketplace dynamics. The report noted that speculative interest in oil right now is four times as high as it was in June of 2008, just one month before the peak oil price of almost $150.00 was reached in July of that year.
But the impact of speculation cannot be understood without understanding the role of the value of the US dollar. Today, oil is traded globally in US dollars. For the past six months or so, the value of the US dollar has been falling significantly against most major currencies, especially the Euro, the Japanese Yen, and the Chinese Yuan.
So, oil buyers in other countries could in effect buy oil more cheaply because they get more dollars and oil for the same amount of Yen or Euro as the dollar falls. Or, those buyers - whether they be refiners or speculators - can pay more for a barrel in dollar terms but be paying the same in their own currencies.
Rising oil prices also allow producing countries to keep "whole" in real terms when they are being paid in dollars that are worth 20% less today than they were six months ago.
During the last big oil run up of 2007-08, a number of analysts produced charts showing the inverse correlation between the value of the dollar and the price per barrel of oil. As the value of the dollar declined, the price of oil rose in near lock step.
"The US dollar has been the main oil price driver for most of the last several years and the inverse relationship between the US dollar and oil and commodity prices has been exceptionally strong," says Dominick Chirichella, a writer for the International Business Times. "The US dollar has been faltering versus most major currency pairs, with the US dollar Index now trading at the lowest level since around August of 2008.
(Transportation Management Article Continued Below)
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