Dollar/Oil Link Shows Impact of U.S. Budget Deficit on Crude's Price

Posted Feb 5th 2010 4:40PM by Joseph Lazzaro
Filed under: Politics, Oil

The way the price of oil has plummeted this week on the dollar's rise amid the flight-to-safety lends more support to the theory that if the U.S. budget was balanced, crude would fall, oh, about $30 or $35.

Oil is priced in dollars. Hence, when the dollar falls, oil's price usually rises, and vice-versa. Starting in 2001, the dollar began to weaken as the U.S. budget went from a surplus under President Bill Clinton to a deficit under President George W. Bush, with the euro strengthening from about 82 cents versus the dollar to the current $1.3605. During that time oil's price has more than tripled from the $25 per barrel crude price in 2001.

Of course, oil's price, in the current decade, also is being supported by the prospect of increased oil demand globally, particularly from faster-growing emerging market economies like China and India.

But oil's $8 plunge in a matter of days this week to $70.64 per barrel on concern that Greece's fiscal woes will spread to other countries in Europe, which strengthened the dollar, provides more evidence of the dollar -- and hence U.S. budget deficit -- link. The reason? Balancing the U.S. budget would strengthen the dollar, all other factors being equal.

Fiscal/Economic Analysis: Without question, the U.S. budget deficit -- and the weaker dollar it creates -- has increased the price of oil. The problem is, balancing the federal budget will require: 1) health care reform (we know how that project fared), and 2) tax increases, in addition to spending cuts. Hence, until U.S. policymakers make the tough decisions needed to balance the budget, Americans will continue to pay a higher price for oil and gasoline -- a 'budget deficit premium,' if you will, for their oil and gasoline.

Tags: budget deficit, dollar, featured, gasoline prices, inthenews, oil prices

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Reader Comments (Page 1 of 1)

2-06-2010 @ 11:30AM

rogerlarkin said...

Why would you require health care reform to balance the budget ??? Or a tax increase ??? That makes no sense !That type of thinking brought us where we are today.

2-06-2010 @ 3:19PM

thedude said...

You're forgetting that starting in July of '08 through December '08 oil prices fell steadily, reaching a low of $33 per barrel.

Ban the speculation and commodity trading of oil and we can set the price at whatever feels good. Do you think that the OPEC nations receive $100 per barrel ? That answer is NO ! It is the oil industry that receives the lions share, they pay a fixed price to the countries they drill in, it's probably in the neighborhood of about $15 per barrel or less but these drilling contracts are pretty closely guarded secrets to my knowledge.

Actually what we need are tax CUTS as well as spending cuts. Eliminate all pork, eliminate all entitlement programs (welfare and what not) It is not the federal governements responsibility to take money from the have's to use for buying votes from the have nots. But the feds sure do act like this is their raisen d'etre

Healthcare reform is needed, absolutely - but if it is adminstered by the government it will escalate medical costs and multiply the corruption ten fold

We need to ban all immigration, including foreign adoptions until everyone in the US who wants a job has one - as jobs leave the country at record speed we still have unchecked immigration which only exacerbates the unemployment issue.

We then need to cut imports by about 75% and reinvest in a US manufacturing base, thus creating jobs and creating more taxpaying citizens instead of sponges that absorb the taxes currently paid by the middle class.

Once we have more jobs than citizens, then we can focus on improving health care (which is actually a very simple process but requires more intellect than most politicians possess and also requires sacrificing politicos egos for the betterment of the people- kind of like what they are supposed to do)