Saturday, May 14, 2011

Do Oil Executives Understand Their Industry’s Economics?

On Thursday, CEOs from the five largest American oil companies testified in the U.S. Senate, ostensibly to defend $2 billion worth of tax write offs from Democratic attack. The hearing’s true purpose was to showcase senators getting tough on oil executives for high gas prices.

Watching the theatrics, one was left to wonder if the executives actually understand the economics of their industry, specifically the role the dollar’s foreign exchange value has on oil prices.

What a pleasure it would have been to watch senators respond to a CEO who, in discussing high prices and corresponding high profits, simply displayed two charts:

The dollar index:

The oil price:

Clearly, the oil price is a near-mirror image of the dollar's foreign exchange value, including the great dollar appreciation of summer 2008.

Instead, the executives discussed world markets, restrictive U.S. regulations, effective tax rates, and a dozen other issues which were relevant, but secondary. The bottom line is, oil prices are elevated because the U.S. government, including Congress, for a decade has ignored (or encouraged) a weak dollar.

The weaker dollar foreign exchange price transmits commodity inflation to the U.S., which is why the oil price today is above $100 per barrel. Oil companies should stress this point every time they get called out for high prices and profits.


  1. This is a causation fallacy. The world hit peak oil at the same time that China and India boomed and the US debt-financed a war. A weak dollar does contribute to higher commodity prices; however, to suggest that it's a 1:1 relationship as you have, is simply misguided analysis. The creep in oil prices is overwhelmingly due to supply and demand issues.

  2. In the last two weeks we've seen oil and other commodities decline as the dollar has risen. In the late 1990s, despite an historic global boom, oil was $12, because the dollar was high. Watch what happens when the dollar rises further this summer following QE2.

  3. And now look where we are. Time for a repeat of this exercise.