The Real Solution to Higher Oil Prices

I hope members of Congress are paying attention because I’m about to reveal one of the biggest (and most ignored) reasons why oil prices have pushed higher and exactly how to fix it.

The best way I can explain it is to compare Congress to a doctor.

When you’re sick and go to the doctor, you tell him how bad you feel.

Your doctor then determines – based on your symptoms – why you’re sick and how to make you feel better. Not only will he work on lessening your symptoms, but he’ll also give you medicine – be it an antibiotic or whatever – that treats the root cause of those symptoms.

Now imagine that you have a bacterial infection and instead of giving you those antibiotics, he simply told you to take some Tylenol for the temperature and some over-the-counter allergy medicine for the stuffy nose.

Sure you’d feel better, but if you stopped taking the medicine you’d feel sick again since the cause of the symptoms – the bacterial infection - was never treated.

This is exactly what’s going on in America. Congress spends too much time trying to eliminate symptoms without curing the underlying disease.

In the case of the oil market, what are the symptoms? Well, higher oil prices for one. And a growing amount of speculation is another.

This week Congress took a good, hard look at those symptoms, and they think that limiting speculation in the oil markets is the cure. But did Congress ever wonder what caused this excessive speculation in the first place?

If speculators see one investment rising 10 percent per month and another by five, they’ll buy the one that gives them the best return. So in reality, speculators are just reacting to higher oil prices by buying and looking for the return. They aren’t the cause of high oil prices, just a symptom.

So what caused higher oil prices? We know the obvious answer of more foreign demand from Brazil, India, Russia and China. But this isn’t the only reason why oil prices have gone up so much…

Considering a barrel of oil is priced in US dollars, wouldn’t the 40 percent devaluation of our dollar over the past eight years contribute to higher oil prices?

You bet it has.

My reasoning is very simple, too. As the devalued dollar pushes oil prices higher and higher, speculators look to the oil market as a place to make some decent gains. So they enter the oil market and make bullish bets. As investment increases and the dollar devalues further, prices move higher.

Now these speculators are getting bold. They’ve made good money in the oil markets and ramp up speculation… and you can see exactly where this is heading.

If it weren’t for Congress’ spending money like a bunch of irresponsible dolts, the value of the dollar may have never dropped by 40 percent and the price of oil would be much, much lower today.

I’m not alone in this assessment either.

The current president of OPEC, Algerian Energy Minister Chakib Khelil, said that a drop of one to two percent in the dollar versus the euro could add another eight dollars a barrel to oil prices.

The facts are there. But why would Congress EVER accept blame for something as controversial as higher gas prices? It’s an inconvenient truth that they’d rather ignore.
So they blame everyone else and distract those citizens that they were meant to serve.

And as they distract you from the real issue by making you hate oil companies and believe that oil speculators are heartless-people, they do nothing to stop the dollar’s fall.

Serious it’s their fault that you and I pay more than 250 percent more at the pump today than back in the year 2000. If they continue on this path, we could very well see the bankrupting of America in our lifetimes. And we could see our currency turn into even more of a joke than it already is.

The solution for Congress is simple.

1. Acknowledge that the dollar is one of the root causes for drastically higher oil prices.
2. Admit this to the nation.
3. Follow up by saying the U.S. will institute a strong dollar policy and have Paulson, Bernanke, and Bush go out everyday saying this nation needs a strong dollar.
4. Raise interest rates to above the level of inflation to combat inflation
5. Cut back government spending and make sure our nation is back in a surplus within the next two years.
6. Continue to push higher gas efficiency by upping CAFÉ standards on all cars and trucks.

The sad thing is that this solution is one Congress won’t do. They probably won’t even think about it. It’s simply too ‘hard’ for them. Not to mention that there’s simply too much logic involved in it. To think, this simple solution said nothing about eliminating the Fed or redefining their roles in the market (now that would be hard!).

But if Congress could make this happen, we’d quickly see an impact on oil prices as our dollar began to strengthen in just the first few months. If these things don’t happen, then one of the root causes pushing oil prices higher will never be addressed. Congress will waste their time and taxpayer dollars.

Because they would be interfering with the oil markets by causing oil prices to drop by so much, they would throw off the profitability of some major offshore and alternative oil finds and cause oil companies to cut back on exploration (which would affect supply). And let’s not forget about the increase in demand that would follow as oil prices drop back down to $3 per gallon.

In the end, what the government is proposing (putting a leash on the ‘devil’, oops, I mean speculators) threatens to add more demand and less supply to an oil market which is already undersupplied. Sure, it might push oil prices down for the next year. But they won’t stay there. And when oil prices move higher again, they will move much higher.

The solution Congress should be working on right now is how to strengthen the dollar.

Since that doesn’t look likely to happen anytime soon, I’m sure that oil prices will head much higher than the nearly $150 we saw just this past month. In a few years, prices could easily be over $200… even $250 a barrel.

Imagine how many speculators the market will attract then?

Stay free,

Charles