Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24
How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - 17th Feb 24
Why Rising Shipping Costs Won't Cause Inflation - 17th Feb 24
Intensive 6 Week Stock Market Elliott Wave Training Course - 17th Feb 24
INFLATION and the Stock Market Trend - 17th Feb 24
GameStop (GME): 88% Shellacking Yet No Lesson Learned - 17th Feb 24
Nick Millican Explains Real Estate Investment in a Changing World - 17th Feb 24
US Stock Market Addicted to Deficit Spending - 7th Feb 24
Stocks Bull Market Commands It All For Now - 7th Feb 24
Financial Markets Narrative Nonsense - 7th Feb 24
Gold Price Long-Term Outlook Could Not Look Better - 7th Feb 24
Stock Market QE4EVER - 7th Feb 24
Learn How to Accumulate and Distribute (Trim) Stock Positions to Maximise Profits - Investing 101 - 5th Feb 24
US Exponential Budget Deficit - 5th Feb 24
Gold Tipping Points That Investors Shouldn’t Miss - 5th Feb 24
Banking Crisis Quietly Brewing - 5th Feb 24
Stock Market Major Market lows by Calendar Month - 4th Feb 24
Gold Price’s Rally is Normal, but Is It Really Bullish? - 4th Feb 24
More Problems in US Regional Banking System: Where There's Fire There's Smoke - 4th Feb 24
New Hints of US Election Year Market Interventions & Turmoil - 4th Feb 24
Watch Consumer Spending to Know When the Fed Will Cut Interest Rates - 4th Feb 24
STOCK MARKET DISCOUNTING EVENTS BIG PICTURE - 31st Jan 24
Blue Skies Ahead As Stock Market Is Expected To Continue Much Higher - 31st Jan 24
What the Stock Market "Fear Index" VIX May Be Signaling - 31st Jan 24
Stock Market Trend Forecast Review - 31st Jan 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Are Higher Oil Prices About to Set Off an Inflationary Spiral?

Economics / Inflation Jul 19, 2013 - 01:26 PM GMT

By: Money_Morning

Economics

Dr. Kent Moors writes: There is a long-held belief that significant increases in oil prices are harbingers of building inflationary pressures.

It follows from the observation that a market able to absorb more expensive oil is also one where prices are rising elsewhere.


And for those who remember their "Intro to Economics," there is an additional element.

Recall that the two primary factors that cause inflation are the amount of currency in circulation and the velocity with which that currency is changing hands.

In the case of the former, the relationship between oil prices and inflation obliges us to apply a somewhat broader view of what makes an underlying "marker asset."

After all, the actual price of wet barrels (traded consignments of actual crude or the products made from it) is driven by the price of paper barrels these days (the futures contracts on those deliveries).

Since there are many more paper barrels than wet barrels, it is the perception of traders on the future price of oil that drives this market not what a delivery costs this morning.

Which leads us to inflation's other component: the velocity of money...

Oil Prices and the Velocity of Money

Let's make this one simple. The velocity of money increases in an environment where participants believe prices will be rising. In this environment, money tends to change hands more quickly causing prices to go higher.

In short, there is less reason to save money if it is perceived that prices will rise faster than any proceeds that could be had from the use of the withdrawn currency. Read here: "The rise in staple product prices will exceed the savings rate."

When it comes to a commodity as energy, so fundamental to economic activity, an increase in velocity will translate into a classic inflationary spiral.

Or at least this is the traditional argument.

Of course, it goes without saying that a pronounced and prolonged price explosion such as the one we experienced five years ago certainly would carry significant inflationary consequences.

At the peak in 2008, price levels did climb as oil rose to an intraday high of $147.92 a barrel and natural gas was pushed $13 per 1,000 cubic feet or million BTUs (the NYMEX futures contract for gas).

Yet the situation we have this time around carries very different dynamics indeed, just take a look:

  • First off, while current indicators do point toward higher crude oil prices in 2013, they are not to the extent we witnessed in 2008. We are seeing pricing increases - West Texas Intermediate (WTI), the benchmark crude rate on the NYMEX, is up almost 23% in less than three months.
  • But on the other hand, natural gas is trading at less than $3.70. And despite it being almost a 100% improvement from the lows of early 2012, is not going to be exacting the same upward pressure on the energy sector as a whole.

  • Second, the bond market is not contributing to an inflationary impulse the same way it did five years ago.
  • And last, while the U.S. economy is improving, it has been a very sluggish recovery so far with unemployment remaining higher than in a normal upturn, industrial productivity still showing signs of weakness, and a weaker dollar than in years past.

True, the U.S. situation is still preferable to the contraction underway in Western Europe. Then again, the primary global energy demand is still seen as coming primarily from China. It's actually in China where the inflationary impact is most likely to initially emerge.

Oil Prices as the New "Gold Standard"

With the rise in crude oil as a parallel for gold in registering the storing of market value, and that crude still denominated in dollars, the opportunity for asset valuations moving into oil as a surrogate is intensifying.

In fact, until the plunge in gold is over, this movement is not going to reverse.

Even then, the more fundamental importance of oil as a barometer of genuine market activity will likely restrain a quick return to gold as a primary offset for either economic downturns or inflation.

In my judgment, all of this means the following...

At some point, given the reluctance of the Fed to abandon quantitative easing (QE) and the concern expressed by the investment markets that such an end is coming anytime soon, inflation will emerge.

Yet the end of QE is likely to be later rather than sooner.

In the interim, oil has the leverage to expand in price without providing the usually associated open door to inflationary pressures.

That is good for us. After all, we are investing in energy and oil remains the primary driver of that sector.

Any prospect for increased raw material prices that are not inflationary means the rising tide will lift more boats - producers, processors, transporters, service providers, distributors - before the increase in prices begins to serve as a break on profitability.

And that translates into better returns on our energy investments.

This oil prices analysis was originally delivered to subscribers of Dr. Kent Moors' Oil & Energy Investor. For Moors' take on the energy sector's biggest price and investment moves, and his free bi-weekly energy investment analysis, just go here.

Source :http://moneymorning.com/2013/07/18/are-higher-oil-prices-in-2013-about-to-set-off-an-inflationary-spiral/

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in