Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.
Two headlines from today’s AP wire say it all: Another New Low for the Doillar; and Oil Near Record as Dollar Falls.
One of the immediate “unintended consequences” of the Federal Reserve’s rate-cutting response to the threats to US economic growth posed by the housing/credit crisis has been a continuing fall in the US dollar’s relative value against major global, and even many largely local, currencies. At the same time, the price of oil on world markets has risen to a level now $20 above where it was a year ago, even as inventories in the US have turned runed slightly upwards and the hurricane season continues to pass without any major damage to production or refining capacity.
Some of the oil price action is undoubtedly a result of speculative investment that will be sold off at some point, bringing price action down. But the reason for this speculation is clear — expectation of higher overall prices of commodities due to a continuing decline in the currency in which those commodities are priced.
Absent a decision on the part of oil producers to insist on payment in Euros rather than US dollars (see my recent post “the Subprime Dollar”), it would seem that in due course (though not yet) these higher oil prices will be passed along to the gas pumps and US consumers will feel yet another pinch in their wallet. And this time it may just tip the balance in favor of changing their behavior to opt for less driving altogether — the kind of “‘demand destruction” we have not experienced in the gasoline market for some considerable time.
It is precisely this kind of behavioral change that the advocates of carbon taxes are seeking to achieve, but so far have found very few political sponsors (the long-term Michigan Congressman JohnDingell being one exception, but he may just be kiddingin an effort to call out the obvious lack of popular support for such proposals.)
Given the apparent absence of political will to force consumers to amend their driving habits even to reduce the flow of funds to sponsors of terrorism, evironmentalists may come to see the Federal Reserve as the latest example of public officialdom adopting the “clean and green” label.
A lower dollar accomplishes a good deal of the impact of a carbon tax without the need for legislative action — those messy processes called democracy. While oil priced in dollars actually becomes somewhat cheaper for drivers living in other countries, US consumers will be forced to pay more for their driving privileges — the only problem is that, unlike the case of an actual tax, the increase in the price of gasoline due to the lower dollar accrues to the oil supply chain, not to the government as an offset against some other tax (many advocates of carbon taxation specify scenarios that would be “revenue neutral” to the government by allowing for equivalent reductions in other taxes on consumers).
A further reduction in the Federal funds rate on Halloween by the Reserve Board would seem likely to advance the cause of higher gasoline prices — scary for consumers, but a possible “green pumpkin” for the environment.
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