The Fed Does Not Pump Up Oil Prices

I cannot tell you how many times I have heard people say, "The Fed is printing money and that's why oil prices are rising." The only thing that determines the price of oil is supply-and-demand, and a big part of that supply/demand equation is the monopolistic factor in the oil market. By that, I mainly mean, the Saudis, who are really the only ones with any excess capacity. They set the price at the margin. The way they operate is to set the price to their customers and allow quantity to adjust. Same way the Fed sets overnight rates. They state a target rate, then manipulate reserves so that the rate is hit and held constant. Actually, it's even easier these days because they just pay interest on reserves, but I digress.

Getting back to oil, when it comes to the price, outside of the Saudis and supply and demand, nothing else really matters that much. Not the Fed's monetary operations or the size of its balance sheet or the foreign exchange value of the dollar. It's funny how people use the dollar's exchange rate as an argument to explain every fluctuation (mainly the up fluctuations) in the price of oil. They'll say, the dollar's falling, so that's why oil prices are rising. But how does the foreign exchange value of the dollar affect the supply and demand of oil? It doesn't. If the dollar falls, relative to, say, the euro, then a European gains purchasing power in exact proportion to the purchasing power lost by an American. The quantity of oil demanded has not changed and the amount of oil produced has not changed. The only thing that has changed is that now a European can buy a little more and an American can buy a little less....338 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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