Oil and dollar -- Are we in a feedback loop?

A year ago, the State of Oregon produced its official tax revenue estimate and commented that although there were some dark clouds on the horizon, one positive possibility was that the cost of oil would go down. The state economist figures that at $60/barrel, it was somehow inflated above its natural price level.

Now, with oil prices almost 150% higher than that, I'm starting to wonder if there isn't a financial feedback loop at work here. Gasoline is a highly price-inelastic commodity. If you need it, you buy it, and cut your expenses elsewhere. Over a period of time, people will come to own more efficient vehicles and perhaps live closer to where they work, but in the short run, this isn't much of an effect. Gas has doubled and consumption is down in single digits.

The problem is that so much of our consumption comes from foreign sources. As the price goes up in USD, the trade balance worsens and the USD drops relative to other currencies. Other countries find it easier to compete with the United States to buy the oil, raising the cost of oil in USD, driving down the dollar, etc.

Obviously, it can't go on forever, but it may explain why we've reached levels that nobody would have seriously even speculated on a year ago.