Dollar, Gold and Gasoline: Much Ado About Nothing

EconMatters's picture

By EconMatters

U.S. regular gasoline price has spiked almost 4% in one week to $3.688 a gallon as of Feb. 26, the highest level since last September, with residents in three states--Alaska, Hawaii, California-- are already seeing above $4 at the pump, based on AAA's Daily Fuel Gauge Report.


The current price level is roughly 11% above a year ago.  Analysts estimate that every 1-cent increase in the price of gasoline costs the economy $1.4 billion.  Consumers are starting to feel the pinch, and a new Associated Press-GfK poll says 7 in 10 Americans find the issue "deeply important". 


Crude oil is one of the oldest and most complex commodities in the world heavily underpinned by geopolitics, and market speculation throughout its history.  Now, with Iran, Israel, U.S. and Europe exchanging sanctions, threats in daily new headlines, it is hard to imagine anyone in the business world would miss the connection between surging oil, gasoline prices, and escalating tensions over Iran's nuclear program.


To our surprise, Forbes published an op-ed by Louis Woodhill dated Feb. 22 titled "Gasoline Prices Are Not Rising, the Dollar Is Falling" blaming the surging gasoline prices on the dollar depreciation, and that


"Assuming thatgold pricesremained at today’s $1,759.30/oz, WTI prices would have to rise by about 22%, to $128.86/bbl, in order to reach their long-term average in terms of gold.....At this point, we can be certain that, unless gold prices come down, gasoline prices are going to go up—by a lot. And, becausethe dollaris currently a floating, undefined, fiat currency, there is no inherent limit to how far the price of gold in dollars can rise, and therefore no ultimate ceiling on gasoline prices."


While we don't disagree that there are many moving parts that could drive oil and gasoline prices higher, but  the U.S. dollar and gold are not among the deciding factors as the article asserts.  


First of all, crude oil and related processing accounts for over 80% of what we pay at the gas pump (see chart below).  So the short answer to the recent gasoline price spike is the surging crude oil prices, and more specifically, Brent oil marker on the ICE exchange. U.S. gasoline prices have been trending more closely with Brent since WTI has largely lost its benchmark status due to the inventory glut at the logistically-challenged Cushing, OK.



Chart Source: EIA



For one reason or another, crude oil seems to always have a drama each year.  Last year was Libya and to some extent the Arab Spring, and this year is Iran's turn.  As the chart below (indexed to Dec. 2010 as the base year) illustrates, there is some correlation between the price of Brent, average retail gasoline, and the Dollar Index (DXY) , but the direction of the dollar does not fully account for the volatile oil and gasoline.



Market fundamental factors such as dwindling "easy oil" production and reserves, and strong Asian oil demand are also part of the drivers behind strong crude and gasoline prices.  However, the spike in gasoline prices this years is primarily due to the fear factor of supply shortages should Iran play hard ball (a highly unlikely scenario, see our discussionhere), and speculators bidding up the price exacerbating the legitimate worries from real end users.      


Gold and crude oil do sometimes move in tandem when funds flow to the direction of the age-old inflation trade - long commodities, short the dollar.  Furthermore, dollar does typically have an inherent inverse relationship with commodities, since most commodities, including crude oil, gasoline and gold, are priced in dollar.  Nevertheless, these are hardly the cause of the effect of "no ultimate ceiling on gasoline prices." as Woodhill concluded regarding the current run-up of gasoline prices.  

Dollar debase has been going on for over a decade and in the long run most likely would continue without some fundamental fiscal reform as the U.S. debt topped the $15-trillion mark, and Federal Reserve's extraordinary measure to keep interest rate low till 2014. Fed Funds Rate has been targeted at 0%-0.25% for an unprecedented 3+ years since Jan. 2009.  Most other central banks around the globe also have been on the monetary easing bandwagon since the Great Recession.


This "great punch bowl" served up by central banks would eventually come back to bite the world economy in the form of stagflation in the developed countries or hyperinflation in other higher growth regions.  Nevertheless, time time around, dollar devaluation has little to do with Iran geopolitics, and speculators jacking up the oil and gasoline price right now.


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Flakmeister's picture

The price rise is due to a no-vote of confidence in geology to produce more...

There will be "noise" in the price... but the trend is clear, too many people chasing too few barrels...

Anyone care to explain otherwise the following facts:

1) Global net exports are down ~10% since 2005

2) The BTU content of "All Liquids" which is called oil by the MSM is all but flat since 2005

3) World C+C production since 2005 is basically flat....

Any discussion of oil prices which does not address the above three facts can be relegated to the puff-propaganda-piece category....


So typical... 3 junks and noone with the balls to dispute the real underlying reasons for the rise in gas prices...

mayhem_korner's picture



Do the writers realize that the chart defies the premise?  I don't even need to do the math or log-scale the dollar and oil prices to see that the correlation is there.

Move on.  Nothing to see here.

kaiserhoff's picture

The writer must be a feminist.  I thought they were the only ones who could be wrong about everything.

In broad terms, I have to agree with Jim.  The long term trends in commodities, especially PMs and oil have to be a vote of no confidence in the dollar. 

If anything is priced in, it is the constant warmongering of the Zionists.

The short run issues are the bone headed anti-energy policies of Obama, and a lack of sensible investments.  People who should know better are "investing" in grains and the energy complex, because Ben the Bug Headed has robbed them of sane alternatives.  Free markets would cure this, if we had them.

itchy166's picture

Nancy is that you?

adr's picture

At this point we don't even know what the true market price of oil would be. It has been so distorted by the manipulated market and central bank liquidity injections, true supply and demand isn't even visible.

We know there is more than enough supply stored in the US. We know that more supply is currently being held as an investment hedge than held for actual productive use. China is buying reserves, not buying for current production and consumption. How much of the current inventory of oil is being bought as an investment vehicle vs industrial use? You can't get an accurate reading of a market when 90%+ of the market is pure speculative investment.

Oil was under $20 a barrel in 2000. Doubling demand and even a small supply shortage wouldn't have been able to send a barrel to $147. During the entire ramp period there was never actually a supply shortage. Even $50 a barrel under current demand would be a hard sell. The USA has so much spare production capacity, and low demand, that over 50% of refined products are exported. So far the decline in Euro and US demand has offset the increases in China and India. Demand growth that looks to be subsiding.

What would happen if an export ban on refined products, or massive export tariff, was placed on US production? There would be such an immediate oversupply of gasoline and distillates, the price would plummet.  

Same goes for nearly every other commodity. Over the past few years volumes in the exchanges have gone off the charts. Corn contracts that used to have monthly volumes in the low thousands now trade over a quarter million contracts a day. There aren't that many actual buyers of corn. How much of the price increase is attributable to market speculation over actual demand?

People who didn't even have gardens bought tulip bulbs because they were told it would make them rich. The massive increase in speculative investment and trading volume caused a massive valuation bubble. Yes at the time it looked like tulip bulbs were in short supply, only because there were more buyers than the supply could handle. Eventually people figured out that the supply was actually adequate for the true intended use of the bulb. You need to plant it eventually, if you can't plant it you're just holding a worthless chunk of matter. Eventually every bubble bursts.

Oil is no exception, the speculative play is that there is far more demand for the product than supply. The problem is the majority of the demand is coming from speculators, not industrial consumption. The reality is there is more than enough supply for the current level of demand. With refineries shutting down and demand dropping every week, eventually speculators will be holding a contract for something they can't actually use, and can't sell. If the central bank printfest stops, the supply of money to purchase ever increasing amounts of equities and commodity contracts stops. Which means there will be far more sellers than buyers, maybe 90% more. What happens then?

Sabibaby's picture

We know there is more than enough supply stored in the US.

Plenty of rainbows and fairy dust too. You would be a rich man if you could figure out how to bring that "supply" to the pump for the same price Saudi Arabia can send us the light sweet stuff...

Flakmeister's picture

Go take another hit off the hopium pipe...

Do you think demand causes oil to suddenly manifest itself???


falak pema's picture

What makes predicitions difficult is the excess monetary liquidity looking for safe havens. In the current context a "safe haven" is a placement for a couple of days! Whence the roller coaster; too much liquidity for speculative plays and bankster derivative scams, not enough for organic growth. The Dollar debasement is a given, so the fight is more about exporting commodity inflation through speculative and oligarchy plays; as there is huge concentration now in commodity access. The traders are getting bigger and bigger and small guys are being shoved out, making the market shake like a cocktail, in the hope of being able to ramp it up later as pure monopoly/oligopoly play in the hands of world Oligarchs.

When that happens it will be clarify more and more as Oligarchical stand-offs of regional interests; China, USA, Eurozone etc. who represent the market needs and Oligarchical commodity traders who control supply, from EM sources; will be in increased contention. The fight can only get worse. So the suppliers have a top hand as long as the energy paradigm does not move out of today's key commodities : Oil and gas. 

In this interim twenty year period, if energy prices rise too fast it provokes huge recessions and demand falls fast, as will prices. So we will see a lot of sharp swings and this should accelerate the desire for new energy paradigm. Those who are big today could be small tomorrow. Internet will play an increasing role in accelerating this trend. We have seen this in service sector we will see it now in industrial and commodity sectors; the world is condemned to find new and novel solutions and captial will flow to any start up wherever it may be. Those who bring new solutions in a changing world carry a premium.


Jim in MN's picture

For about the thousandth time, oil prices are a combination of fundamentals, currency movements and short term risk/positioning.

Ascribing all of the oil price to any of these, or ruling out any, is playing readers for fools.

The more interesting take is to observe the interplay of forces, and be alert for times when they all line up in the same direction.  But such times don't last, and the combination of forces that can abruptly 'defect' from a trend leads to our esteemed volatility.

Right now the US fiscal deficit is indeed a dominant upward force on oil prices through absolute and relative devaluation (DXY index).  Fundamentals are also in a long term tightening trend, but not nearly as much as some would believe--China isn't the boogeyman here.  Neither is Achmaninidjad, despite the risk premium being added for Iranian disruptions.

No, we are the boogeyman.  Anti-taxers and big spenders are both arguing to raise the price of oil.  Inconvenient, no?  Boo hoo hoo.  Deal with it.


Balance the Budget and then let's talk about oil prices. 

Flakmeister's picture

Babbling on about oil and not one mention of the fact that despite throwing 2 trillion at the supply side in the last 8 years the producers have been unable to increase supply....

Could you describe what has happened to the North Sea,  Mexico and the North Slope production in the past few years? Were you aware that Egypt became a net importer in 2010??

Could you elaborate on the rise in demand from Chindia and how that compares to US demand over the past 10 years...

You are blowing smoke out of your ass.... cease and desist.

aerojet's picture

From this very site, I learned that oil demand is at at year 2000 equivalent.  If demand plays such an important role, I'm not seeing the correlation with price at all.  Unless, that is, the dollar really has been devalued so horribly since then.

therearetoomanyidiots's picture

It has been so devalued.  And they'll be printing more dollars and buying it all back up further increasing prices for everything, just to keep this clown in office. 



Gene Parmesan's picture

However, the spike in gasoline prices this years is primarily due to the fear factor of supply shortages should Iran play hard ball (a highly unlikely scenario, see our discussionhere), and speculators bidding up the price exacerbating the legitimate worries from real end users.

This article is ridiculous in both its conclusion and how it gets there.

Jim in MN's picture

Beginning a post with italics disables the voting buttons, but I still vote you a big UP.

Solarman's picture

It is fiat devaluation driving oil higher.  Everybody is printing, hence golds rise as well.

t0mmyBerg's picture

YEs a better chart to put up there with crude prices than the DXY is the CB Balance Sheets.  In some ways it is fear of future dollar devaluation that is driving hard assets up.  There is a very clear inflection in 2002 up for crude and many other commodities.  What happened in 2002?  Bernanke was appointed to the Board of Governors for one thing.  And gave his money printing speech in November of that year if memory serves.

Vince Clortho's picture

There's a Down Side to all this money printing?

Widowmaker's picture

Make the acceptance of delivery mandatory and you will see the price go South of $50/barrel.

aerojet's picture

I was thinking about that idea just the other day.  The reason we have futures markets is to offset risk for producers.  You want a certain amount of speculative activity, so forcing delivery on all buyers would be a bad move because the pool of speculators would disappear and the whole idea is to spread out risk.  What is wrong right now is not speculative behavior--we need risk takers--what is wrong is how much liquidity exists to speculate with and how much of it has been thrown into commodities now that the equities markets are a robo-traded zombieland.  The part I find so unbelievable is the amount of leverage being played with in commodities markets versus equities.  I guess they don't care because if they blow themselves up, they'll just go and get a quiet bailout from the Fed. 

As long as these sorts of games can be played where the little guy is always the unwitting bagholder, America is a dead letter. 

Jim in MN's picture

Respectfully disagree.  First of all, speculation is as apt to decrease prices as to increase them, tending to be a trend magnifier.  Second, your suggestion would eliminate financial risk hedging by airlines and others, leaving only physical (for delivery) hedging.  Such a move would cause spot prices to come under more pressure, not less. 

This month, sure, prices might carry $20-30 of 'pure' risk/speculative upside.  But it wouldn't take prices below $50. And next month or next year, in a 'risk off' mode, your suggestion would increase oil prices, not decrease them.  I would bet that over time the speculative factor nets out.  And it misses the main point.

The run from the old OPEC price band of $22-27 to today is almost entirely a dollar story.  And that in turn is a deficit story.  The 'twin towers' of the US trade and fiscal deficit are mutually reinforcing; balacing the budget would lower oil prices substantially while lowering our trade deficit (mainly oil), further strengthening the dollar and lowering oil prices still further.  It is NO ACCIDENT that the bottom for oil prices was exactly when the US budget surplus was at its most robust. 

There is a point where this becomes difficult for our exporters, but the tradeoff in terms of consumer disposable income makes the best balance point a long, long way from where we are now. 

Flakmeister's picture

No it is entirely a supply story...

Explain to me why the amount of oil on the open market is down ~10% since 2005?

Are you aware of something called the Export Land Model?

I strongly suggest that you make yourself aware of it... unless of course you want to sound like a shill on CNBC... 

falak pema's picture

No Oligarchy trader will accept that; its his life blood, the ability to time the market move! Its his true comparative advantage. You make it a planned economy by doing that. So there is conflict of interests between those who want market pseudo chaos/real manipulation  and those who want market predictability. 

JW n FL's picture



WHY? Wallow in mud now that VIX futures are out?



Cast Iron Skillet's picture

yeah! cut the damn evil speculators out, and it'll drop to where it should be!!