The Dollar and the Gas Pump
By Bryan Caplan
Oil is sold on world markets, and the dollar is now very weak. What would the dollar price of gas be today, if the dollar were as strong as it was back in 2002? Here’s a back-of-the-envelope calculation (gas price data are here; exchange rate data are here):
Today a dollar buys you .6451 Euros, and it takes $4.134 to buy a gallon of gas. Suppose the dollar were still at parity with the Euro, as it was on 11/23/2002 (actually 1.0030, but who’s counting?). In that case, a dollar would buy you (1/.6451)=1.55 times as much. So a gallon of gas would be only $2.667.
The actual price of gas back in the third week of November, 2002 was $1.451. So to a first approximation, if the dollar had been stable, gas prices would have risen by about 80%, instead of 280%.
Admittedly, the U.S. is a big player in world oil markets; if the dollar had been stronger, it would have partly raised the world price of oil, and thereby the domestic price of gas. So maybe a stable dollar would have left gas prices 100% higher rather than 80%. If you adjust for the fact that some costs of gasoline (refining, taxes) are purely domestic, maybe gas would have been 150% more expensive even given a stable dollar. (Can anyone point to more sophisticated calculations?)
Whatever way you slice it, though, the effect of the exchange rate on the price of gas turns out to be enormous. Our present search for scapegoats is deeply misguided, but a few people really are personally responsible for the high price of gas. Contrary to popular opinion, though, they aren’t CEOs in the oil industry; they’re the leaders of the Federal Reserve System. It’s easy to point fingers; but sometimes finger-pointing is right on target.