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Is the budget deficit responsible for high gas prices?

By Chris | October 19, 2007

Clara Jeffery, editor-in-chief at MotherJones, thinks so. In a post that received over 1300 diggs she notes:

“Thus, of the $59 increase in the cost of a barrel of oil to a U.S. consumer, more than $30 is due to the depreciation of the U.S. Dollar and the fiscal and trade policies that have contributed to it. Not Middle East tensions, not China’s increased appetite, etc. “

I agree that a falling dollar is going to make crude oil more expensive for U.S. consumers. Even though oil prices are denominated in dollars, OPEC is a cartel that maximizes profit by setting a uniform price. As the dollar falls relative to most other world currencies, world demand for oil will increase and OPEC’s profit maximizing price will rise.

Where Ms. Jeffery goes wrong is when she claims that, “…a big portion of it [high gas prices] can be attributed to a growing [budget] deficit.” This is contrary to basic exchange rate economics. A growing budget deficit puts upward pressure on interest rates which should make the dollar rise.

It’s just hypocritical to be hysterical about our unsustainable trade deficit and then blame the Bush administration when exchange rates adjust. Gas prices have been rising for a number of reasons, but a growing budget deficit isn’t one of them.

Topics: Exchange Rates | 16 Comments »

16 Responses to “Is the budget deficit responsible for high gas prices?”

  1. joan Says:
    October 21st, 2007 at 7:09 pm

    You are wrong, budget deficits do decrease the value of currency both in theory and in practice. see http://findarticles.com/p/articles/mi_qa3674/is_200301/
    ai_n9307511

  2. Chris Says:
    October 21st, 2007 at 7:59 pm

    The article you cite concludes with,

    “This empirical study suggests that the investigation of the relationship between budget deficit and currency value depends on which effect – direct or indirect – dominates the other, and this proves to be country-specific.”

    Conventional Macroeconomic Theory assumes that the direct effect (cited in the blog) dominates and has empirical support of its own. Thanks for the pointer, the issue is more controviersial then I made it seem. Nevertheless, Jeffrey’s claim that the budget deficit is responsible for the large fall of the dollar is not supported by any mainstream research.

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    Mark, I hope you don’t mind, but I have a bleg for your readers….One of the thnigs that I’d really like to do, but can’t since I can’t find an online application to make one, would be to make a county-by-county gas price cartogram (like the second picture), but one that subtracts state gas taxes from the price per gallon.I can find tools that are set up to make unique state-by-state cartograms, but not for the county-by-county maps. If anyone out there might know of such an application, please post a link!

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