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Tuesday, June 16, 2009

Is it all in the exchange rate?

Considerable hand-wringing is happening concerning the recent rise in gasoline prices. Of course, we went through this last summer, so the media have plenty of "push print" stories they can run concerning the issue. Unfortunately, that means that most of the media stories are wrong or at best wrongly-directed.

Most stories focus on demand side issues, e.g., gas guzzling SUVs are causing the demand for gasoline to be higher than it otherwise would be and this imposes negative externalities on others. Most stories focus on supply side issues, e.g., drilling at home, refinery capacity, lack of a backstop technology. Yet, one thing that very few in the media discuss in the context of what we in the United States pay for gasoline and crude oil is the exchange rate.

Most people don't follow the exchange rate on a given day, after all, the vast majority of daily consumer-level transactions occur in U.S. dollars. Yet, we buy much crude oil on the world market in which the exchange rate actually matters.

This week's Business Week has this telling picture:



Game over.

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