Well oiled...

Click here for a link to an RTE news report on the recent rise in oil prices.

The key sentence in the report is this:- "The weakening dollar boosts oil prices because it makes crude relatively cheaper for buyers using other currencies, analysts say".

The dollar has weakened significantly against the euro in recent months, and since oil is priced in dollars, you would then imagine that oil would be cheaper to purchase for those states which use the euro.

Nuh-uh.

Bear in mind that oil is a finite commodity and that the oil producers are purely motivated by the desire to make as much money as possible while the supply of oil lasts, then it is in their interest to address the issue of increased demand for oil (caused in part by the weakness of the dollar, which eats into the producers' profit margins) by increasing the price of oil.

So the sequence of events is not, as the man on the street might imagine:-

- weaker dollar vs. euro -> cheaper oil

but...

- weaker dollar vs. euro -> potentially reduced profits for producers -> more expensive oil.

On the face of it, and somewhat illogically, we in the eurozone would be potentially better off if the dollar was stronger against the euro, as this would mean that oil would be too expensive, therefore demand would fall, and consequently (in theory at least) the producers would have to reduce the price to stimulate demand. However, I doubt if that's the way the real world operates.

And even if there was a guaranteed unlimited supply of oil going on into infinity, I think the oil producers would find some way to ensure that the price of oil would always go up rather than down. You wouldn't want to give it away now, would you?

Oil is such a vitally important commodity to the global economy that the normal rules of the "punter" economy do not apply. Take avocado pears, for example. Hardly the most essential commodity in the world. And yet one might develop a taste for them and decide to buy them on a regular basis. However, if for some reason the price of avocado pears sky-rocketed, the normal punter might say "Naaah, too expensive..." and decide not to buy them so long as the price stayed high. It's the classic strategy for dealing with unacceptable prices. Am I happy with the price? No. Do I really need them? No. Will I continue to buy them? Not bloody likely.

The same simple scenario does not to apply to oil. Unless someone can come up with a truly viable alternative means of fuelling transport and the generation of energy (not to mention providing raw materials for plastics, fertiliser and the Devil knows what) then we will be compelled to buy oil at whatever price it is offered to us. We have no choice for now. The oil producers are in control. As my late mother might have delicately put it "The fuckers have us by the hasp of the arse".

Of course, one way of removing the oil producers from the equation completely is for us to use up all the world's supply of oil as quickly as possible. That way, the producers would soon run out of a commodity to control and could no longer hold us to ransom.

And I'm doing my bit to advance that strategy right now - I own a Lexus...

Regards,


djp