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Wednesday, May 28, 2008

Chart of US Dollar vs Oil Prices vs S&P500

Some people on TV are blaming the Federal Reserve's easy money policy for the record prices for oil.

The chart below of the US Dollar vs. the price of oil (WTIC) vs. the S&P500 shows between early 1995 and January 2002 the US dollar gained nearly 50% when it went from just over 80 to 120 while oil prices were volatile but flat to higher.

Click chart to see it full sized

For more information, see "Stock Market Returns After Oil Prices Double in a Year or less"

If a falling dollar makes oil more expensive, then you would think a gain of 50% would make oil cheaper. As the chart shows, it is not that simple as oil prices went up considerably between the mid 1990s and the early 2000s but for a brief dip under $20 during our short recession in 2001.

For sure a falling dollar makes importing oil more expensive but it is not the main reason oil is so expensive. Oil is going up because supply is limited and demand is growing. A falling dollar simply makes us less competitive bidding for oil against other countries that have growing economies with stronger currencies.

If we want lower energy prices, then we need to

  • increase supply
    • Find more oil in other countries that are willing to ship it now
    • Drill where we know there is oil in the US such as ANWR and off the coast of California and Florida.
  • lower demand
    • drive more hybrids and PEVs,
    • drive less by combining trips and car pooling
    • take the bus
    • take vacations closer to home
  • Strengthen our currency so our dollars buy more relative to others currencies
    • Raise the Fed Funds Rate
    • Eliminate deficit spending
    • Grow our economy

None of these solutions are painless but we must do all or some of them unless we want to transfer the great wealth our nation has accumulated in the past 200 years to others in a single generation.

To find out how I've profited greatly from these difficult market conditions, subscribe to "Kirk Lindstrom's Investment Newsletter" today!

  • Since 1/1/1999 through 5/28/08 my "explore" portfolio is up 196% while the S&P500 is only up 30% and Warren Buffett's Berkshire Hathaway is only up 83%
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