Gasoline, politics, and the dollar (page 1 of 2)

We have long argued that the Bush administration has been happy with a lower dollar as a weaker dollar should be seen as a means to an end and that end is greater employment growth.

It all seems so one way - the lower dollar together with fiscal and interest rate policy would all combine to stimulate the economy in this election year 2004. In the "politicisation of the dollar" we argued that the administration would be happy with a lower dollar as long as it served their interests.

We went on to argue that by July all the easing should be in place and in the system and a period of stability in the dollar over the election period would be in their best interests.

Here we demonstrate how the lower dollar may be starting to become an election issue much sooner than we first thought. Recently there has been a big political brouhaha regarding gasoline prices. In level terms gasoline prices are at a record high, and it has been recently reported that they have reached a national average of $1.80 a gallon.

Although on the more authoritative database shown in the chart above it is below that level, that should not detract from the overall upward trend and the fact that they are at historically high levels. The Democrats are attempting to make political capital out of the rise in gasoline prices and at this stage Kerry is calling for the government to stop pumping oil into its emergency stockpile.

In addition, Kerry's campaign aides are also stressing that the Democratic candidate wants the U.S. to pressure OPEC to increase production and apply diplomatic pressure to the member nations to reduce prices. However, we would take a different approach - we would argue that a large part of the rise in crude oil price is related to the declining dollar and the rise in gasoline prices is only following crude oil up.


The real price of gasoline (gasoline prices relative to the CPI) obviously tracks crude oil prices. In the US the tax take on gasoline is low by western standards and hence tracks the crude price quite closely. The chart above shows that both real gasoline and nominal crude prices have risen sharply since early 2002, the time at which the dollar started its descent. The connection between the US dollar and oil price is simple.

Oil is priced in dollars and producers do not want their real purchasing power of a barrel of oil eroded by a fall in the value of the dollar. In order to do this, they need to raise the price per barrel as the dollar falls. This would then mean their real purchasing power of goods and services around the world for a barrel of oil remains unchanged regardless of the movements in the dollar. It seems as though they have successfully managed this.

Indeed the chart below shows the oil price in dollars, sterling and in euro, we have also put a trend line through the three different series. This clearly shows that oil price in sterling have been flat and in euros have actually declined. All this means is that the oil producers have managed to keep the oil price in real purchasing power terms flat.

It is clear that part of the rise in petroleum prices can be put squarely on the shoulders of a weaker dollar and driving the dollar lower would only serve to push crude prices up and pump prices up. This is causing some discomfort for the administration and it is the first sign that the lower dollar is starting to hinder rather than support Bush's campaign.

Of course supply and demand balances around the world also determine the oil price and it is extremely difficult to desegregate this impact from a falling dollar.