Kerry has blamed President George W. Bush for
soaring gas prices, faulting him for not putting
more pressure on OPEC and for being slow to pursue
energy independence. Bush has shot back in his
campaign ads, ridiculing Kerry's previous call
for a 50 cents hike in the federal tax on gas.
Kerry wants to invest more in advanced technologies,
such as fuel cells.
is pushing for more tax breaks and regulatory
waivers for domestic oil and gas drilling. Yet
in all this public debate, hardly anyone is talking
about what is probably the most important reason
behind the current runup in oil prices -- the
who recall the first OPEC oil shock in 1973 will
remember the central role played by the weak greenback.
In the period from 1971-73, the U.S. ceased being
able to maintain the Bretton Woods system of fixed
exchange rates, with a dollar pegged to gold at
$35 an ounce. Dollar devaluation ensued, followed
by floating exchange rates. For OPEC, this reduction
equaled a huge cut in revenue, because oil is
priced in dollars. Since OPEC is a cartel, it
has a fair amount of pricing power. Dismayed by
the lost income and irritated at Western support
for Israel in the 1973 Arab-Israeli war, the OPEC
nations decided, for the first time, to use that
power to extract a large oil price increase. The
U.S. economy suffered accordingly. FAST FORWARD
30 YEARS. The dollar has again lost a large part
of its value (over 40% against the euro since
2002, and more than 20% against the yen). For
oil-producing countries, this equals another enormous
revenue loss, and they are raising prices to make
it up. Indeed, if oil were priced in euros, OPEC's
revenue per barrel would not have taken a hit.
In addition, as in 1973, Arab nations are less
than thrilled with Washington's Middle East policies.
Once again, gasoline prices are soaring.
it fair to blame the cheap dollar on the Administration?
It is, and here's how the dots connect. First,
the Administration's tax and budget program hasn't
produced enough purchasing power for ordinary
people. Despite one month of good job growth,
median wages have not kept pace with inflation.
Consumer and business debt are high, and the economy
is not generating enough jobs and consumer buying
power. The economy also suffers from a chronic
trade imbalance that is increasingly structural.
With fiscal policy exhausted, the Federal Reserve
has had to come to the rescue with very cheap
money. Extremely low interest rates, of course,
yield a weaker dollar.
can be laid at the Administration's door for another
reason. Countries with irresponsible fiscal policies
find that their currencies lose respect in global
currency markets. As budget deficits have gone
skyward, confidence in the dollar has gone down.
Some foreign exporters, Toyota Motor Corp. (TM
) for instance, choose to absorb the exchange-rate
loss and take an earnings hit rather than lose
U.S. market share. Others, such as purveyors of
fine French wines, have raised dollar prices.
But the oil cartel is a special case that is able
to engineer its prices -- indeed, that's the definition
of a cartel. Gasoline, unlike French wine, is
a necessity with no near substitute. Most consumers
just absorb the increase because they have to
observers have contended that the high price reflects
refining bottlenecks or increased global demand.
Despite increasing demand from China, overall
oil consumption is projected to go up only about
2% this year. The main culprit is OPEC's manipulation
of the price of crude, most recently with a 4%
production reduction, which in turn reflects the
cheap dollar. March and April are months when
home heating costs decline and the expenses of
summer air conditioning and vacation travel have
not kicked in yet. Other things being equal, energy
prices should be enjoying a seasonal decline.
will this all play out politically? The connection
of soaring prices at the pumps to the cheap dollar,
the Bush tax reductions, and climbing budget deficits
may be obscure to the average voter. But it doesn't
matter if most voters miss it, since they tend
to judge incumbent Presidents by a visceral response:
Is the economy good or bad for me? High gas prices
are one more reflection of an economy that still
feels bad for millions of Americans. That can't
be good for President Bush.
Kuttner is co-editor of The American Prospect
and author of Everything for Sale.
Posted: April 14, 2004