From WSJ Political Diary 9/9/08

There are two explanations for the lower oil price. The dollar has been rising relative to other currencies and gold. The near 20% fall in gold from its $1,000 peak earlier this year has driven down the price of oil, just as the collapse of the dollar relative to gold from 2001-2007 explains about 90% of the rise in the oil price over that period.

The other reason oil prices are drifting downward is consumption of oil has fallen sharply. Energy Information Administration data show that demand in the first half of 2008 dropped by 800,000 barrels a day. This is the sharpest drop in 26 years. Demand for oil is proving to be more price elastic in the short and medium term than experts previously thought. We don’t need costly government energy conservation programs when oil prices are high. Markets work in energy and if you don’t believe that, go into a Hummer dealership if you can still find one.

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