How the War is Driving Oil Costs Up and American Families Down

On Thursday, August 21, the New America Foundation hosted Richard Vague, CEO of Energy Plus and author of the report “Terrorism: A Brief for Americans“, to discuss rising oil costs and their effect on American families. Video of the event is available at right and and an mp3 audio file can be downloaded below.

Vague began by pointing out that even in the light of recent price drops, the price trend of oil over the past four years has been one of unprecedented increase. Since the eve of the invasion of Iraq in 2003, the price of oil has quadrupled from $28 to over $100 dollars a barrel. Central to the explanation for this increase is the Iraq War’s effects on the strength of the dollar and oil price risk.

Conventional wisdom points to explosive demand growth among developing countries as the main reason for this increase, but this ignores broader global demand trends. Oil demand in the U.S. and EU has actually decreased over the past year and global demand growth has averaged an anemic 1% annually for the past several years. Demand growth has actually been decelerating over the past two years, even while the price sustained its greatest increases.

The real reason behind high oil prices is the weakening of the American dollar that has happened as a result of expansionary monetary policy on the part of the Federal Reserve and massive increases in federal spending in the Iraq War. Since the beginning of the invasion of Iraq, the dollar has fallen more than 40% versus the euro, which has dramatically decreased the ability of the American dollar to purchase oil.

The instability that the United States’ invasion of Iraq has injected into the Middle East has added to this pain by increasing the risk premium charged on oil. By making future supplies of oil increasingly insecure, the Bush Administration has increased the price of oil as markets raise prices to hedge against risks of a catastrophic reduction from conflict in the region, further adding to the pain felt by Americans at the pump.

To break this trend, the next administration will be faced with two equally unpleasant plans of action. One is to reverse the expansionary monetary policy of past decade and sharply raise interest rates to reign in the monetary supply, a difficult and painful maneuver for American families’ purchasing power. The second is to massively decrease federal spending, slashing military expenditures and social programs in an attempt to bring the federal budget in line with the American economy. However the next president chooses to deal with the policy malfeasance of the past eight years, it will be a difficult time for the American economy and American families.

-Ian McAllister, Research Intern for the Economic Growth and American Strategy Programs

Participants
Featured Speaker

• Richard Vague
  Former CEO, First USA Bank and Barclays USA
  Chairman, AmericanRespect.com
  Author, "Terrorism: A Brief for Americans"

Moderator

• Steve Clemons
  Director, American Strategy Program New America Foundation
  Publisher, www.TheWashingtonNote.com