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Falling Dollar Pushes Oil Prices Up, Weakening Economy

March 4, 2008 at 6:45 PM EST
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As the value of the dollar falls, the price of imported oil rises, which impacts costs from the gas pump to the grocery store. A reporter from the Wall Street Journal examines the current state of oil prices.
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JIM LEHRER: And next, a second economics story, the price of oil and its connection to the dollar. Ray Suarez has that story.

RAY SUAREZ: The price of oil shot to a record level briefly yesterday, breaking the high set in 1980. Although the price has dipped since, the cost of oil has headed in just one direction since last March.

Back then, a barrel of crude traded at nearly $60. It has climbed steadily since. And as the dollar’s value dropped last month, the cost of oil jumped, reaching a record of $103.95 a barrel yesterday.

To understand what’s happening, we turn to Neil King of the Wall Street Journal.

And, Neil, what’s been driving oil higher for the last year, but especially in these last of couple of months?

NEIL KING, Wall Street Journal: It’s a big question, and there’s a lot of mystery around it. I can tick off a few things; none of them will get to the total bottom of it.

But one is the dollar itself. The dollar goes down; oil prices go up. Oil is denominated in dollars.

There’s the weakness of the U.S. economy and the desire for a lot of investors to find refuge in other places, so they’ve been moving into the oil.

They’ve also been moving in huge ways into other commodities. Commodities of all kinds are setting record highs, obviously gold, silver, platinum, even wheat, corn, even coal, which is rather extraordinary.

And, lastly, I would point to the concerns out there that are really growing about whether we’re going to have proper supplies five, six years down the road. Will oil supplies continue to be able to meet demand? Or will there be a moment when demand might possibly exceed supply?

And this particular concern, which is a sort of peak-oil concern that some people are raising, is filtering into OPEC. The oil minister of Saudi Arabia yesterday was saying that this particular pessimism, which he calls “unfounded,” is one of the reasons that’s really driving oil up, as investors think, “Wow, this is a commodity that may become increasingly scarce down the road.”

Impact of rising inflation

RAY SUAREZ: Do these two factors push each other, a weak dollar and strong oil? Is there a sort of chicken-and-egg thing going on at the center in this?

NEIL KING: Yes, there is very much. I mean, the previous segment you had about that was also about inflation, obviously, the more oil goes up, the more inflation goes up, the more that it weakens the dollar, the more that investors move into oil as an investment. And that, therefore, pushes the value of oil up at the same time.

Oil has gone up about 64 percent over the last year in dollar terms. It's gone up about 49 percent in the last year in euro terms. So this is obviously something that's hitting the U.S. a lot more than it is the Europeans. And that gap is sort of the dollar variance right there.

RAY SUAREZ: Well, who are the big winners and losers then? If you're a country that's selling things, something like oil that's denominated in dollars, are you hurting or is this covering the spread, this rise in the price?

NEIL KING: Well, I mean, the biggest winners by far are obviously the oil-producing countries who are having massive windfalls as a result of this. The Kuwaitis have just announced that they're doubling -- their budget forecast is going to be twice what they thought it was going to be for this year.

And the losers are easy to point to, obviously, the developing countries, for whom energy is already very expensive, gets a lot more so, drivers in the American Midwest that work minimum-wage jobs, that kind of thing.

I would point -- I think, in some ways, that in the long term the American public might even be a winner in a way, because this is a kind of a wake-up moment now that is obviously really stirred the debate to think about alternatives.

Are we driving too much? What should other alternative forms of fuel be? And I think that we're starting to move in that direction, which is a necessity.

Influence on foreign economies

RAY SUAREZ: In Paul Solman's report and in these latest oil figures, you see some concern about the future value of the dollar. Are countries starting to hold other currencies instead that used to hold their reserves in dollars?

NEIL KING: Well, not in a big way that would be significant. The big players on that are, of course, China, which has enormous amounts of American currency in its foreign reserves and the big oil-producing countries, like Saudi Arabia, Kuwait, all of the Persian Gulf countries.

And there's been a debate there about whether they should move off the dollar, because it's also caused high inflation in those countries, which has been difficult and somewhat destabilizing for their economies.

So far, they've all held fast. And for countries like Saudi Arabia, this is also a sort of foreign policy question.

Long-term projections

RAY SUAREZ: Well, it's interesting. Today, stats came out that show that crude oil supplies are up worldwide. Demand for gasoline is down. Yet the price stays so persistently high, and people filling up their tanks this week will certainly notice it. What's going on?

NEIL KING: Well, part of that -- that's the interesting thing of the two things that are going on. One is a long-term picture that a lot of people are concerned about.

Then there's the sort of speculative froth of money moving into the oil markets. And then there's the actual reality of this moment, which is what you've just said.

Gasoline supplies in the U.S. are at a 14-year high. Gasoline demand is going down. Stockpiles are building. So one reason that oil fell somewhat today is that people are saying, when the Department of Energy tomorrow releases its weekly report, they're going to say, "Look, there's even more oil in the United States now."

And people may wake up and say, "Wow, we actually have a kind of weird oversupply issue right now," and the price could start to fall quite a bit. So there's the short-term now issue and then there's the longer-term sort of supply issue. And they don't necessarily match.

RAY SUAREZ: Neil King, thanks for joining us.

NEIL KING: It's a pleasure.