Prices on American oil are closing in on $110 a barrel.The price of Brent oil is already $125.
This in the face of a global economy that is still in the midst of a disappointingly slow recovery.
Yes, the Iran situation isn’t helping. But the slope of oil prices was up and to the right long before the latest tensions with Iran.
This is the third time in the last 5 years that oil has blown past $100 a barrel. And this time, as the saying goes, it’s different.
The first time oil crossed the $100 barrier, back in 2008, it seemed a bizarre, ridiculous aberration. The culprits, Congress shouted, were “speculators”–evil, rich hedge-fund types who were gambling with everyone else’s lifeblood. We just had to clamp down on speculation, Congress roared, and then oil prices would return to their natural level of $20 a barrel.
Some people, thankfully, quietly argued that the oil price spike was the result of natural forces–namely changes in supply and demand. With the rise of China, India, and other huge countries in the developing world, the demand for oil was going up, while the supply of oil was staying pretty much the same. These folks were shouted down by the “blame speculators” crowd, but their voices were at least heard.
Then the global economy crashed, oil prices tanked, and everyone forgot all about that.
Well, now, a few years later, oil prices have again surged through the $100 level. This time, the price rise has been slow and steady–a gradual ramp from the bottom in 2009 (see chart). And, this time, thankfully, there are no more (or at least far fewer) ridiculous attempts to blame the increase on speculators.
And that’s good.
What isn’t good is that the price rise is likely the result of two factors that are more permanent:
- Ongoing changes in the balance of supply and demand (namely, demand outstripping supply)
- Ongoing destruction of the value of the dollar (read: inflation).
On the first point, many sharp analysts have argued that the changing supply/demand imbalance for oil and other commodities is now permanent, and they have logic in their favour: More and richer people, finite supply. Jeremy Grantham, for one, believes that we are in the early stages of a historic “paradigm shift” that will drive commodity prices into the stratosphere. (See: “GRANTHAM: We’re Headed For A Disaster Of Biblical Proportions“).
The way to help offset changes in supply and demand is to increase supply (drilling, exploration, alternative energy, pipelines) and reduce demand (conservation, alternative energy)–in other words, the development and implementation of an intelligent National Energy Policy. Congress has only to look in the mirror if they’re looking for someone to blame for that one.
On the second point, we would merely say that you can’t have your cake and eat it, too.
Specifically, the Federal Reserve cannot continue to inject unlimited amounts of free money into banks with the aim of bailing out the banks and propping up house and stock prices without also propping up other prices.
And although the Fed still wants to pretend that food and energy prices should be excluded from inflation calculations, the price trends of the last decade illustrate that this position is ridiculous.
People have to buy food and energy. And thanks, in part, to the Fed’s desire to bail out the banks and prop up stock and house prices, the price of most food and energy keeps going up.
That’s inflation, whether the Fed wants to call it that or not.
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