Saturday, April 16, 2011

Role Of The Fed & Libya In More Expensive Oil

Steve Hanke claims that:

The biggest single contributor to oil price increases in recent months is not located in Libya, but at the headquarters of the Federal Reserve in Washington, D.C.
I disagree. While the Fed's dollar weakening QE2 has certainly played a role in the increase in oil prices since mid-February, it is less important than the war in Libya. If Hanke's own estimate that a 1% drop in the dollar's value against the euro causes a 0.5% increase in the dollar oil price is correct, then the weak dollar has only raised the dollar oil price by 3.5% as the dollar has dropped by 7% against the euro during that period ( from €0.74 to €0.69, which in inverted terms means that the euro has appreciated from $1.35 to $1.45).

Contrast this 3.5% with the total dollar oil price increase of more than 30% . Indeed it should be noted that the oil price in terms of euro is more than 20%, from about €62 per barrel to about €76 , despite the fact that for example the ECB's tightening measures and the disaster in Japan has helped hold down the euro oil price. Even if we assume that the effect is twice (7%) of what Hanke estimates, it still pales with 20-30% effect of the war in Libya.