One oft-repeated phrase from Washington is that there is "no magic wand" that can lower oil prices. This has proven to be comedic gold for some. But for people who find themselves paying nearly $4 a gallon to fill up their tanks, the joke is not so funny. After all, with an "oilman" in the White House, it should come as no shock that the price of a barrel of the gooey stuff has risen 5-fold since January 2001 -- hitting a record $126 today.
I noticed that every time the Fed cut interest rates, the dollar dropped in value and the price of oil rose. As I posted, this dynamic is as sure of a bet as you can get in the real world. That's why traders are shorting the dollar and going long oil. And they're betting enough on that trade to drive up the price of oil consistently. As I discussed last night on New England Cable News (NECN), the European Union decided yesterday to keep its interest rate at 4% to fight inflation. Ours is a mere 2% so investors are selling dollars and buying Euros.
This brings us to how Washington can cut gas prices fast. All it has to do is to raise interest rates. This little move requires no Congressional approval and the oval office occupant doesn't have to sign a bill. If our Fed got serious about fighting the rampant inflation it has unleashed, it would raise the Fed funds rate, the dollar would strengthen, the price of oil would drop, and you would pay less at the pump. It's as simple as that.
So why won't Washington raise interest rates? It's too busy trying to bail out its paymasters on Wall Street at your expense. Or as the Fed might put it, its efforts to jump start the normal functioning of the capital markets take precedence over inflation concerns.
With that and $80, you too can fill up your gas tank.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.











Reader Comments (Page 1 of 1)
5-09-2008 @ 12:06PM
Dan Barnett said...
Mr. Cohan, meet Mr. Roberts (previous post) & if I read his point correctly he cites the rising price of oil even through the last round of raising interest rates as refuting the correlation between interest rates & oil prices.
When President Clinton was faced with rising oil prices he sold from the strategic reserve.
5-09-2008 @ 12:47PM
William said...
The reasons for high oil prices are:
a) VP Cheney met secretly with oil company executives to set prices without competition.
b) Bush and Cheney and Rice lied to start the Iraq war to:
1. take control of Iraqi oil,
2. take Iraq oil off of the market to raise the price of oil,
3. create more demand for oil by the high fuel usage by military vehicles such as ships, aircraft, tanks, etc., and
c) Big corporations like Hillary's Wal Mart take manufacturing and jobs to China are helping themselves to cheap labor while they create a communist demand for oil.
5-09-2008 @ 1:09PM
Pat Kenmir said...
ACTUALLY...... Looking back at 1978, gas was $ 0.50 cents a gallon and nice cars cost $ 5,000.00.
GAS is now at $ 3.75 GALLON and nice cars cost $ 38,000.00. I think OPEC thinks that if Americans can afford $ 40,000.00 cars, they can afford $ 4.00 a gallon gas.
GAS is going to continue to rise until Americans get rid of their huge SUV's and any car that weights over 2,500 lbs. If that doesn't work..., get a second job to pay your fuel costs. By the way driving at 55 miles per hour saves anywhere from 25 to 40% of the fuel in your tank, so you can drive much farther on a tank of gas. I drive 55 miles an hour on the freeway and get to my destination only 3 to 4 minutes later.
5-09-2008 @ 7:30PM
winslow said...
If the government were serious, we would have programs in place to counteract the high oil prices. 1) Tax incentives to purchase vehicles that achieve over 30-35mpg.
2) Additional taxes on vehicles that get less than 20mpg
3) Ethanol is a huge mistake. Admit it. It takes more energy to produce (in addition to driving up food costs)
4) Develop mass transit between major cities (high speed rail system)
5) Smart Cars (over 40mpg) available for low-cost daily rent at rail terminals
We are seeing the demise of the US because of incompetent politicians and fraudulant corporations.
5-09-2008 @ 10:34PM
Chris said...
Yeah, the American consumer and his near inelastic demand have nothing at all to do with the rising price of gas. It's just Bush's fault.
5-10-2008 @ 12:16AM
james said...
Why dont we stop pouring expensive oil into the reserves? Let the arabs know we will buy no more until they drop the prices. They can eat sand until they do
5-10-2008 @ 7:23PM
PASCHAL said...
I COMPLETELY AGREE WITH THE ARTICLE. LOWERING THE INTEREST RATE ONLY HELPS FINANCIAL AND LARGE INSTITUTIONS. IT IS VERY NEGATIVE ON AVERAGE AMERICAN. OTHER THAN PAYING HIGHER PRICES WE GET LOWER INTEREST RATE ON OUR SAVING ACCOUNTS. PROMISES ARE MADE TO AVERAGE AMERICANS DURING ELECTION AND AFTER THEY ARE IN OFFICE THEY PANDER TO LARGE POWERFUL INSTITUTIONS.
5-11-2008 @ 1:57PM
JOHN said...
The paradox is gas will rise and people will try to conserve giving the oil companies to gain billions more in profits in the future.
Americans must see that the president sides with corporations and big business - and made the excuse that we should have tapped into Alaska and it's congress who voted it down years ago.
America should have attacked Iran the true terriorist country - and sits on an untapped oil reserves. And again the village idoit will listen to bad advise from his cronies. His hideous speeches show that he is caught like a possium eating s*!t.
5-11-2008 @ 6:18PM
robrt lipton said...
just allowing domestic off shore and alaska exploration would crack the speculation and lower gas prices and raise the dollar ...but noo to placate rabid environmentalists .we'll have to wait til oil hits 200 a bbl to do the obvious..by then the public demand for lower prices will override the green and ethanol lobbies...
5-11-2008 @ 6:45PM
mollies817 said...
bush is a oilman beween line and he is the reason that gas in so high trying to fund a war that should not have happen and when someone say work another job that should not be the case I pull 5 hours a week and take care of my mother 15 hours a week the cost of living is to high I make good money I still live check to check with do nothing extra work and go home its the gas prices the food price the bills I will happy when Bush is out
5-14-2008 @ 9:06PM
oldfarts said...
The "Fed" is a privately owned bank!!! Policies of the Federal Reserve Bank are directed by the foreign owned private stockholders (period)...NOT our United StatesFederal Government ..Wake-up time..we have been under "bank control" for almost 100 years... another sell-out by washington politicians---GOD will judge the preachers first and the politicians second so will see how it works out for earth's back room deals/dealers...timmme is longer on the other "side" than walking in flesh a few decades or so. Repentance requires Truth's ways not deception. Deception of using words to coverover freedom so that they can rob/steal by using politicians to pass laws for protect...???Who's really protecting who and who's is work for who's citizens??? I don't know-- what's you answer!
5-17-2008 @ 1:47PM
robert said...
CONSERVATION!!!!!!!! we could save a lot of gas by stoppoing mail delivery on saturdays Think of all the miles driven with saturday mail to every farm and ranch and home in the country.! Instead of raaising the price of stamps every year why not cut costs!!! The postal employees take holidays and it does not interupt the mail service!!!!! robert