Vague blames high oil prices mostly on monetary factors. He said the decline of the dollar, low interest rates, and heavy spending on the war in Iraq without offsetting taxes were the real reasons for high oil prices. He played down the role of supply and demand, saying that global petroleum demand was up 1 percent, an increase he thought was tiny.

As Vague correctly pointed out, the price of oil in dollars is up four-fold since April 2003, while the price in euros is up 260 percent. To me, however, the increase in euros is still pretty dramatic. Vague figures that without a depreciation in the dollar, oil prices would be only $70 to $80 a barrel. And he says that if you subtract the risk premium attached to fears about a possible war with Iran, then prices would be only slightly higher than they were in April 2003. He went on to say that oil prices came down in the 1980s because then Federal Reserve chairman Paul Volcker raised interest rates and bolstered the dollar.

I agree that monetary policy and the value of the dollar is important, and that the cost of the Iraq war has not only driven up the U.S. national debt but also undercut the currency. But I felt that Vague grossly understated the role of oil supply and demand. After all, what's one of the main reasons interest rates influence oil prices? Higher interest rates affect oil prices largely because they slow down the economy and dent oil demand. And the strong dollar in the 1980s wasn't the main reason why oil prices fell then. The spike in oil prices that arrived after the Iranian Revolution in 1978 prompted U.S. utilities and manufacturers to switch away from oil to natural gas or more efficient equipment. Then the Volcker recession slowed down the economy. In addition, the impact of federal fuel efficiency standards for automobiles lowered gasoline use.

Overall, oil demand fell by 19 percent from 18.8 million barrels a day in
1978 to 15.2 million barrels a day in 1983. And that - combined with new supplies from the North Sea - helped bring down oil prices despite war between Iran and Iraq.

It remains to be seen whether we are now in the midst of a similar drop in oil consumption. Vague called the 1 percent increase in world consumption last year modest. In my mind, a 1 percent increase in consumption of a good whose price has doubled is amazingly large. The demand for most items would have plunged if the price were doubled (especially on top of an earlier doubling of price). But changes in oil consumption always take time, given the cost of new cars and equipment. This year it looks as though U.S. oil consumption is falling about 3 or 4 percent. It remains to be seen whether Americans will get used to high prices or whether this decline is just the beginning of a larger drop in petroleum consumption in the U.S. and elsewhere around the world. Those are numbers to watch.

Finally, it's important to consider cause and effect when it comes to oil prices and the strength of the U.S. dollar. A weak dollar may translate into high oil prices, but high oil prices also weaken the dollar by fueling inflation and adding to the U.S. trade and current account deficits. On this question, Vague was, well, a bit vague.