Petro-dollar Pain

By Capt. Duane Woerth, ALPA President
Air Line Pilot
, June/July 2005, p.5

ALPA’s U.S. pilots who fly internationally routinely experience firsthand the effects of the U.S. dollar’s decline against foreign currencies. The sticker shock at European and Asian restaurants can be positively jarring. However, the biggest problem for pilots with the falling dollar is that it has led to higher and higher crude oil prices.

A couple of months ago, Newsweek featured an article by noted economist Robert J. Samuelson entitled, “The Incredible Shrinking Dollar: What it Means for America’s Future--and Yours.” In his opening paragraph, Samuelson noted several positive things occurring in the overall American economy, but highlighted the “major exception being $50-a-barrel oil.” 

While few U.S. financial newspapers and magazines have linked the declining dollar with the increasing price of crude oil, the foreign press routinely does just that. One exception is The Wall Street Journal, which on March 28 published a chart showing that “in the last 3 years, oil and the U.S. dollar have made their sharpest move apart in decades.”

When I was in London recently to give a speech to the European Transportation Conference, many of the participants, including European airline executives and representatives from European capital markets, asked me two questions relative to this subject. The first: Do most Americans realize that because all oil is traded in U.S. dollars (hence the term petro-dollars), that they were being harmed the most by the declining dollar and rising oil prices? The second: Do U.S. airline employees realize the competitive disadvantage a declining petro-dollar was causing their carriers? I replied in my fluent American, “Nope.”

Since reaching recent highs in mid-2001 and early 2002, the dollar has dropped 38 percent against the euro and 23 percent against the yen. So what does that have to do with competitive airline fuel costs? Quite a lot, actually. Because all oil is traded in petro-dollars, European airlines have a currency-adjusted fuel-price advantage of 38 percent, as compared to 2001-2002, when they exchanged euros for dollars to buy fuel. Compared to 2001-2002, Japanese airlines have a 23 percent improvement in their fuel-purchasing power. In an industry that eliminates pillows and pretzels to save pennies, this amounts to a monumental pricing advantage.

Besides advantages related to currency, European and Asian carriers routinely hedge fuel defensively and, unlike U.S. carriers, pass on to customers the increased fuel costs they do experience. What a concept!

The dollar is declining because of a deliberate economic policy decision made early in President Bush’s first term to force the dollar down in hopes that it would help our beleaguered manufacturers and ease our terrible trade deficit. Unfortunately, analysts agree, the move has had practically no effect on either problem because most Asian nations, including China, peg their currency to the U.S. dollar rather than let it “float” or adjust freely. 

The result is that a Mercedes-Benz and a few other European products are now more expensive to import, but the trade deficit chasm with China widens every day. Meanwhile, the laws of economic self-interest are influencing oil-producing nations to limit production to force crude oil prices up so as not to lose worldwide purchasing power in other currencies (particularly the euro).

The price of oil will in large measure determine the future of the airline industry. Although other factors are of course involved, what happens to the value of petro-
dollars will influence where that price ultimately stabilizes.

If the Bush administration would reverse course or at least intervene to prevent a further decline of the dollar, some relief might be in sight. I make that very point when I speak with analysts, airline managements, and the news media; but as long as oil companies are making record profits and the American consumers/voters remain passive and docile in the face of punishing oil prices--nothing is going to change.

The falling dollar and rising oil prices are not random accidents. The current administration consciously and deliberately devalued the dollar. The increased price for crude oil traded in petro-dollars was a predictable result.

Do you think the administration feels our pain?

s/Duane E. Woerth