Philadelphia Reflections

Linking Oil Prices to the Credit Crisis

Soaring Gas Prices

When two unexpected things happen at once, it's natural to think them related, but it nevertheless has been a little hard to see how soaring gasoline prices would be caused by falling prices of California homes, or the other way around. If these explosions are indeed unrelated but only occurred at the same time, it leads to the "perfect storm" theory that neither alone could cause a market freeze-up, but perhaps two at once would overwhelm the safety buffers of international markets. Whichever way it turns out to have been, there is a political hazard. The cold northeastern part of the country is mainly concerned about the cost of home heating fuel, while the warm southwestern states naturally focus more on the housing glut and falling home prices. The political danger would be that congressional representatives of the two regions might get polarized along those lines, potentially blocking effective national action to rescue either problem.

All of this may turn out to be a pipe dream. Eight months after the financial panic began, evidence has been brought forward that a quite sizeable amount of the rise in the price of oil, as much as half of it, may be due to speculative activities by hedge funds, attempting to use oil as a hedge against the falling dollar. Since the dollar is falling because of interest rates lowered by the Federal Reserve attempting to rescue banks, as well as stimulus packages passed by Congress for the same purpose, everything may be part of the same parcel. If this theory proves out, it helps concentrate government action on the basic culprit and quiets at least some of the blame game.

It even suggests a partial solution might be to persuade Europeans to be less protective about the abnormally strong Euro and let it ease a bit. This is the third identifiable source of the weak dollar, which the American public has so far largely ignored. During a presidential election campaign, the aroused American car driver might be persuaded to raise quite a fuss about what those non-voters across the ocean are up to again.

Originally published: Sunday, May 04, 2008; most-recently modified: Sunday, July 21, 2019