Oil as measured in dollars reached a multi-year high on Tuesday. Some are no doubt wondering how this could be. Fracking enthusiasts have assured us for years that innovative oil extraction techniques would render the cost of crude a yesterday worry.
Except that at $70/barrel, oil presently trades at a price that is seven times what a barrel fetched in 1998. What’s the story? Wasn’t fracking supposed to put a virtual fence around the U.S. such that its citizens no longer needed to fear expensive gasoline again? Weren’t we supposed to become the Saudi Arabia of North America, swimming in oil so abundant that we'd become the world's supplier? Wasn’t fracking supposed to put other energy-exporting nations out of business, or at least clip their margins?
Back to reality, the market for oil is global. The notion that increased extraction stateside was suddenly going to push a global price down was always the stuff of fantasy and hype that could never live up to actual market realities.
Wait, some will say. It’s the Biden administration! Joe Biden wants to ban fracking and rising oil is the market’s response. Ok, no doubt it’s true that the economically confused 46th president has a negative view of fracking, but that’s not why the price of oil is high. Figure that in reaching $70/barrel, oil is at highs last reached in….2019. Last this writer checked, Donald Trump was president then, and he didn’t hate fracking.
Ideally oil’s latest lurch past $70 will finally wake economists, politicians and the pundit class up to the basics of money. The dollar is the proverbial elephant in the oil barrel, but in the 21st century it seemingly became low rent to talk about a dollar that the Reagan and Clinton administrations talked about a lot in the ‘80s and ‘90s. It was in those decades that oil hit modern lows of the $10 variety. The economy was booming. There was a correlation. Please read on.
To understand money better, it’s worth it for readers to think about their height if suddenly the inch were cut in half. If so, those of us who are 6-feet tall would measure 12 feet. Yet as readers can surely deduce, our height wouldn’t change one iota. It would only change in terms of measures like the inch and foot.
Money is no different. The reality is that changes in the price of money don’t in any way alter the real prices of actual market goods. Money, like the inch and foot, is a measure. Shrinking the measure that is money won’t suddenly shrink the cost of goods as much as it will alter the costs of goods in terms of the currency in which it’s measured.
Shrinking the currency is inflation. That’s why the policy choice that is devaluation (inflation if you prefer) is so harmful to workers of all stripes. Suddenly the money they earn and have earned doesn’t exchange for as many goods and services as it used to. Also, investment drives growth. When investors put money to work, they’re buying future returns in money. Devaluation is a tax on investment.
Looked at through the prism of the dollar, in the 21st century it has fallen against the euro, pound, yen, Swiss franc, Aussie dollar, and just about every other foreign currency. What about gold? When gold rises in dollars, it’s not the value of the yellow metal that’s changing; rather it’s a sign that the value of the dollar is shrinking. That’s why monetary authorities for centuries pegged their currencies to a fixed weight in gold. Stability of the measure in terms of the metal ensured stability of the money measure.
Still, gold reflects the truth regardless of whether it's still used as a money standard, and the truth about the 21st century dollar is telling. While a dollar purchased 1/260th of an ounce of gold in 2001, in 2021 it buys 1/1900th of an ounce. Translated for those who need it, the measure that is the dollar has shrunk quite a bit over the last twenty years. And since commodities are traded daily in deep markets, is it any surprise that oil priced in dollars commands quite a few more greatly shrunken dollars in 2021 versus 2001?
Oil didn’t spike in the 2000s because of sun spots, or demand from India; instead it spiked because the measure in which it’s priced in world markets plummeted. Realistically the silliest argument made about oil to this day is that economic growth boosts its price. What a laugh. Oil was once again cheap in the booming ‘80s and ‘90s, but it was at nosebleed levels in the malaise-ridden 1970s, and it’s similarly traded at many multiples of ‘80s/’90s prices in the economic-crisis laden 21st century. Shrink the measure, and you’ll get rising prices.
Amazing about all this is that so few have drawn the obvious correlation. As mentioned previously, the dollar is no longer seen as worthy of discussion in polite circles.
Except that the dollar’s movements are the primary drivers of oil’s movements. Fracking is meek relative to the dollar. Better yet, fracking is a consequence of the dollar. Oil can only be profitably extracted stateside at prices that are many multiples of what it costs to bring oil above ground outside the U.S. For fracking to make economic sense, the dollar must be debased.
In short, the fracking story was always hype. For it to make economic sense, those who earn dollars must suffer shrinkage that artificially boosts the price of crude. Basically the U.S. economy must take a hit so that fracking can have its day. The view here is that we were much better off in the ‘80s and ‘90s when fracking was largely unheard of, but the dollars we earned were much stronger due to their stability.
