Tag Archives: euro valuation

Biofuel’s link to ‘euthanol’

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Full story here.

This story is several weeks old, but the message is still important: biofuels are starving people.

Governments are quickly reassessing their biofuel strategies because they realize the effect that this policy direction has the world’s less-advantaged. I heard a story about how the TTC is going to reduce its purchase of new biofuel buses for this reason and how Dalton McGuinty of the Ontario Liberals was reevaluating their fuel replacement strategy.

Of course, studies like this still fail to account for the impact that the US dollar has on all commodities. Last week, most commodities started to tumble in value. Normally, when one, maybe two products experience a shift in price by more than 10% within a very short time-frame, you’d look for basic fundamentals like supply or demand shocks that would affect those prices.

However, when we’re talking about almost all commodities reversing their upward trend, there must be something else at play. The solution: they’re all priced in US dollars and the US dollar took a jump last week when Bernanke declared that inflation must be kept under control.

I truly believe that this kind of international commodity market hegemony is unprecedented and the world would do itself a favour if we found a different way to evaluate the worth of a product, beyond using the US dollar as a proxy.

Ideally, it would be a basket of currencies that reflected the true worth of international goods and services, but which currencies would those be?

The cost of not acting is obvious. The more the US economy crumbles, the more the rest of the world will be subject to a rash of ‘interflation’, international price shocks that are solely related to the tumbling value of the US dollar.

The bad news: as the value of the dollar decreases (which it will start to do again soon as efforts are made to revive their economy), the changes become exponentially different. For example, when the US dollar was trading on par with the Euro, a $0.05 change might translate to a $2.00 change in the price of oil, other things being equal.

When the dollar tumbles to $0.25 vis-a-vis the Euro (which I predict it will once most of the financial crisis finally comes to light), a $0.05 translates to a 20% change in price. Since oil is currently trading in the $120-$140 range, 20% of this range translates to a $24-$28 change in the price of oil.

is that kind of change in price a severe shock or poorly planned international pricing system?