A Strong Dollar only Short Term Remedy to Fight High Oil Prices

I am sure by now most people are tired of hearing and worrying about oil prices, too bad you finally get to hear about it now at the Dailycentre. Within the last week in the news, the Saudis agreed to increase output of oil to an extra 500,000 barrels per day. China decided to reduce the subsidies on oil prices after the G8 and other nations clamored China to raise oil prices closer to market rate in order to weaken demand. China probably decided to do this to empty out the roads in Beijing and to reduce pollution in time for the Summer Olympics.

In the US there has been intense discussion on whether or not the US should drill in the protected areas of the Arctic or in the Gulf of Mexico. The Bush administration has been asking for it for years to drill there. Republican presidential nominee John McCain also supports the drilling. Democratic candidate Barack Obama opposes that solution. Drilling in those places would in theory bring more oil to the American market once it reaches shore strengthening supply. Most democrats and people who oppose this idea believe the impact will be negligble, arguing that the gas in these locations could be gobbled up with in a few years. Tapping the oil will take years before it can be extracted. Depending on the views of experts and analysts, it could take a couple of years to others who say it could take more than ten years. Its impact in the end may just be marginal. These candidates do not have any short term solutions, besides of McCain's support for the 'Summer Tax Holiday' nothing is going to change energy prices.

The one thing that they should be talking about is a stronger dollar. A weak, cheap, dollar makes goods more expensive to the American consumer. A strong dollar would keep inflation and rising prices in check. Oil is traded in dollars, the weaker the dollar is in the global market the more expensive oil will most likely become. As of Friday the Euro sold $1.56 to the dollar in the currency markets making the dollar slightly weaker. Hedge fund managers and speculators are exchanging their depreciative dollars for commodities like oil which provide a currency hedge . Since the Federal Reserve first slashed interest rates in response to the housing bubble traders switched from the dollar to commodities. When they saw signs that the Fed might cut rates they left the dollar. Rasing the federal interest rates is the primary weapon the US government uses to fight inflation and it generally strengthens the dollar by decreasing the supply of dollars on the market. A stronger dollar should be able to reverse this trend and put some downward pressure on the price of oil.

In the case that the housing bubble doesn't peter out anytime soon, then it may be hard to strengthen the dollar by raising interest rates. The Federal Reserve might not be in a position to raise the rates. It could mean more economic problems for this country and around the globe.

If the subprime mortgage mess calms down soon and global economic growth slows down due to the price of commodities and the supply of oil stays consistent, then the price of oil should drop. Higher confidence in the dollar hopefully can lead to less speculating in the commodities market.

The strong dollar appears the only medium short term measure to fight high gas prices. In the long term there are a myriad of different things that can be done but are years away, gimmicks like the tax holiday or releasing gas from the strategic reserves would have negligble effects if any effects at all.