This is painful to write...

I might have been wrong to blame the spectre of speculation pricing on the growing cost of oil.

You are going to have to bear with me on this one... this is something I've been looking into for nearly the whole week, and it isn't easy to condense the idea into a short post. So, what is driving crude oil prices so high, when the supply of oil is UP in the US by more than 3 million barrels per day since 2008?

The US Federal Government. Here's why:

In 1934, the Fed promised that one dollar would be worth 1/35th of the price of an ounce of gold, and that promise was reaffirmed in 1944's Bretton-Woods Agreement when all 44 Allied nations agreed to tie their national currencies to the US dollar and the US agreed to maintain a gold reserve adequate to keep the dollar at 1/35th of the market price of gold.

That system of national monetary policy ended in 1971 when Nixon took us off of the 1/35th gold price standard, and the US dollar became a fiat currency. Since that time, the US dollar has maintained its position as the "global currency" only because of the strength of the US economy in relation to its global partners. In short, we always spent more than everyone else... so the dollar had the greatest value.

Here's the amazing thing about all of this... if the Bretton Woods system were still in place, and the value of a dollar was tied to the price of gold (meaning the value of a dollar went up and down with the value of gold, and the global value of gold was fixed at $35 per ounce), the average cost for a barrel of oil right now would be $2.60 per barrel. Translate that into the national average for a gallon of gasoline, and the price is $0.10 per gallon. Yep... ten cents per gallon of gas.

That is amazing NOW because the $2.60 per barrel price tag for oil is almost worthless today. You can't even buy a Happy Meal at McDonald's for $2.60... literally. Nor can you buy a gallon of gasoline for that. That amazing disparity in prices from what would have been had Nixon not done what he did to today shows that the value of a dollar bill has fallen that much since only 1971... while other emerging economies like China and India are developing at a pace that makes the dollar's value seem even less likely to grow in the future (because they will be able to spend more than we do... routinely).

Much was gained by Nixon's actions, I cannot deny that. In 1987, the stock market crashed even harder than they did in 1929... but the US economy felt almost nothing, and the negative-growth indicators lasted only 4 months (almost not even a recession, really). That is the upside of such free-floating currency policy... but there IS a downside.

Foreign markets where we do much business (but always lopsided business, meaning we buy more from them than we sell to them) have often had currency exchange rates that vary wildly. Japan is one of our biggest trade partners, yet since 1971 the exchange rate on the Japanese Yen has flexed between Y200 per dollar to as low as Y75 per dollar. That makes trade profitability a damn tough thing to predict in the long term. Perhaps a better example is found in currencies that tie themselves directly to the value of a dollar since 1971... and the best example of that is the Mexican Peso. Since 1971, Mexico has had to revalue its peso four times nationally, meaning that country has had to devalue its currency and reissue it in new stock (on average) once every ten years since 1971 because the purchase power of the dollar has fallen faster than the Mexican economy could grow, and that WITH the US as their largest trade partner. Think about it for just a minute... most Americans look at the peso as nearly worthless... but it has ALWAYS been tied directly to the value of a US dollar (at least for the last 50 years), so if the value of a peso is almost worthless... isn't that a reflection on the value of a dollar?

Look, I'm not blaming the fiscal woes of Mexico on Federal currency policies, nor am I suggesting that local Mexican political corruption didn't contribute to those peso crashes. I am simply saying that I think the two are connected, and that the greater decline in the value of the dollar is a major contributor to the cost of oil.

The act of removing the US from the Bretton Woods agreement is now referred to as the "Nixon Shock", and it did shock the global economy... but putting us back would shock it even more, especially here at home. We don't have enough gold in reserve right now to value the amount of US dollars already in circulation at even this morning's dollar value... only seventy four cents on every dollar is covered by US Federal Reserve deposits of gold, and to force a 1 to 1 valuation would send a weak economy into another free-fall.

But perhaps it is time to begin the process gradually. Currency by fiat is no longer proving itself viable in a world were emerging economies like those in India, China and Russia are increasingly competing with US markets, and are increasingly out-pacing the US.

Ending speculation pricing would (I still ardently maintain) take away much of the volatility of the oil market, and keep the price at a more steady, long-term level... but it won't take away the trend upwards in price. That will need to be addressed by guarantying the value of the currency used to buy the oil, and the only way to do that is to ensure the continued strength of the dollar in relation to other global currencies.