WASHINGTON, DC – The Center for American Progress released a report today outlining the grave impact the weak dollar has on consumer prices, including the analysis that 40% of the increased price of oil for Americans is attributed to the weak dollar. In dollars, oil cost about 28 percent more on average in 2004 than it had cost in 2000, but in Euros, the price was 8 percent lower in 2004 than in 2000.
America’s working families have been squeezed for most of this decade by stagnant wages and diminishing health and retirement benefits. Now they face new economic pressures from rising gasoline, food, heating, and electricity prices. A portion of those higher costs are directly attributable to the weakening of the dollar and the economic policies that have produced a weak dollar.
Energy companies are directly benefited by a weak dollar since the value of their domestic reserves increase in proportion to the dollars decline. At the beginning of 2001, ExxonMobil shares traded at less than $36 apiece. By early 2008, the share price had jumped to nearly $85. For most of that period, the increase in ExxonMobil’s share price matched almost precisely the appreciation in the price of a barrel of crude oil.
The fall of the dollar has affected oil prices in two specific ways.
- First, as the dollar falls against the euro and other major currencies, oil-exporting states have been demanding more dollars per barrel of oil to protect their ability to meet expenses paid in euros and other currencies.
- Second, more recently, retirement funds, hedge funds, speculators, and other institutional investors around the world have tried to protect themselves against further declines in the dollar by moving money into commodity futures that are denominated in dollars-financial instruments that will remain stable or even rise against other currencies even as the dollar falls. These investment strategies create, at least temporarily, additional demand for those commodities, driving the price upward.
The fact that oil prices have risen nearly fivefold when measured in dollars, but slightly less than threefold when measured in euros, would indicate that nearly 40 percent of the increased price American consumers are paying for oil is attributable to the weak dollar.
If only 10 percent of the price increase is attributable to the flow of dollars and other currencies into commodities to hedge against further weakening, then at least half of the explanation for high gas prices is the weak dollar.