Tuesday, April 29, 2008

Oil prices

Former Clinton Labor Secretary Robert Reich makes this very important point today,

You want to hold oil prices down? In the short term, strengthen the dollar. Part of the reason oil prices are soaring is because the dollar is tanking.

It's an obvious point but one that is often over looked. One of the effects of the Bush administrations de-facto weak dollar policy is to drive up the cost of oil. The rising cost of oil then effects not just the cost of gas but the cost of food and other goods and services that need to be delivered. The weak dollar policy is propping up our trade imbalance and perhaps the trade off in oil prices are worth it in terms of the overall economy but I'm skeptical of that idea. My gut tells me that the our trade imbalance is so far out of whack that allowing the dollar to weaken amounts to little more than re-arranging the deck chairs on the Titanic. The numbers for 2007 seem to suggest as much,

The Commerce Department reported Thursday that the deficit dropped to $711.6 billion last year, a decline of 6.2 percent... the imbalance is still nearly double what it was in 2001, the year Bush took office.

Strengthening the dollar would bring down the cost of oil and the ripple would be felt throughout the economy, putting more money in the pockets of consumers.

Reich acknowledges that strengthening the dollar would be just a short term fix and advocates a windfalls tax to encourage oil companies to invest in alternative energies and to fund research into alternative fuels.

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