Soaring oil prices threaten dollar, U.S. recovery

By MARTIN SIEFF  |  June 10, 2009 at 10:46 AM
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WASHINGTON, June 10 (UPI) -- Global oil prices are continuing their pendulum swing to higher levels, putting more strain on U.S. and global prospects for economic recovery.

The price for a barrel of oil has now crossed the $70 line, less than half of the record last July but double what it was a few months ago. The jump is linked to the weakness of the U.S. dollar and the traders' opinion that global economic problems are beginning to ease. Ever since OPEC emerged as a mighty force in the world economy in 1973, its leaders have been adept at taking the long view.

Production cuts implemented by the Organization of Petroleum Exporting Countries last fall are apparently beginning to bear fruit for the cartel, and a drop in U.S. oil stocks has played a role.

The rise in crude has been reflected in the cost of refined products. The price at the pump in the United States is now about $2.60 a gallon. This is still far less than last summer's record price peak of $4 a gallon, but it is still a relatively rapid rise from the $2.20 per gallon U.S. average price of a month ago. With signs accumulating that the United States is heading into a new period of serious inflation, that steady rise in energy prices certainly won't help.

Oil prices are rising for a number of reasons, and the OPEC production-limiting strategy may not even be the prime driving force behind them. China has been buying large quantities of oil aggressively to boost its stockpiles. Fears that Israel may launch pre-emptive airstrikes against Iran's nuclear facilities may also be playing a role. But most of all, the latest jump in oil prices appears to reflect a growing lack of confidence around the world, especially in oil-producing nations, that the economic policies of President Barack Obama will bring economic recovery in the United States.

Instead, there are growing fears that Obama's record $3.5 trillion budget and soaring federal deficits will further threaten the already-shaky credit of the U.S. government and the strength of the dollar.

International traders therefore already foresee the threat of major inflation in the United States -- and around the world -- as a consequence of Obama's policies, and they are acting pre-emptively to anticipate it. That is what international traders do in times like these. Of course, by driving up the price of oil, especially in dollar terms, they add to the forces generating inflation, and the process becomes self-perpetuating. That is the last thing Obama and his Treasury Secretary Timothy Geithner want, but their policies are causing it anyway.

The oil price rise is also likely to revive calls within the United States for increased attempts at developing alternative energy sources, but the Democrats are already throwing scores of billions of dollars into such programs, and most of them remain as unrealistic for the foreseeable future as pots of gold at the end of the rainbow.

Wind and solar power together still produce only about 1 percent of U.S. electrical generating capability, and virtually all mainstream analysts agree they will never produce more than 10 percent of America's current electrical generating needs under the most optimistic circumstances -- and not for more than a decade even then. Biomass fuels on a cost-effective industrial scale are still a science fiction vision.

The United States has almost endless beds of coal that could cheaply provide the necessary energy, but environmental activists with their huge influence in the Democratic Party are fiercely opposed to using them without effective carbon capture technology, which is still in its very early and costly stages of development.

The increased offshore oil drilling that the Republicans advocate would certainly help a bit, but oil industry experts are again virtually unanimous that it couldn't begin to make the United States energy independent unless all cars and trucks could be magically converted to non-oil fuels tomorrow. And the Democrats and their environmentalists aren't going to approve much of that anyway.

The two best things the Obama administration could do to try and damp down rising oil prices are maintain peace in the Middle East and restore international confidence in its economic policies. It is already working on the first goal, but it doesn't appear to be succeeding in the second one.

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