Today the dollar's value against the euro dropped below the psychological barrier of $1.50 per euro. In response, oil rose to $81 a barrel. The last time this happened? You guessed it - last summer, when oil prices shot above $100. Will that happen again? Probably not, since we area headed into the fall, the beginning of low demand as the summer driving season ends.
Even at $70 a barrel oil prices were "too high," according to 35-year commodities expert Ashok D. Dalvi, Ph.D., P. Eng. In a recent interview, he explained that current demand for oil doesn't justify even a $70 per barrel price. However, demand alone does not drive oil prices. Oil is contracted in dollars, so as the dollar declines, OPEC must raise prices to maintain their profit margin. Speculation in commodities can also drive oil prices. Between January and July 2008, the dollar fell about 9%. During that same time period, oil prices rose 44%, a result of commodities speculation.
What It Means to You
Commodities traders could drive oil prices up. This would also increase gas prices, which have been enjoying deflation. Higher oil prices could also drive up higher home heating costs. Don't expect high oil prices to continue. Instead, look for continued volatility as investors seek to find pockets of profit by driving prices up, just like they've done with gold.
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