Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
Eye Opening Currency Charts – Why Precious Metals Are Falling - 23rd May 19
Netflix Has 175 Days Left to Pull Off a Miracle… or It’s All Over - 23rd May 19
Capitalism Works, Ravenous Capitalism Doesn’t - 23rd May 19
The Euro Is Bidding Its Time: A Reversal at Hand? - 23rd May 19
Gold Demand Rose 7% in Q1 2019. A Launching Pad Higher for Gold? - 23rd May 19
Global Economic Tensions Translate Into Oil Price Volatility - 22nd May 19
The Coming Pension Crisis Is So Big That It’s a Problem for Everyone - 22nd May 19
Crude Oil, Hot Stocks, and Currencies – Markets III - 22nd May 19
The No.1 Energy Stock for 2019 - 22nd May 19
Brexit Party and Lib-Dems Pull Further Away from Labour and Tories in Latest Opinion Polls - 22nd May 19
The Deep State vs Donald Trump - US vs Them Part 2 - 21st May 19
Deep State & Financial Powers Worry about Alternative Currencies - 21st May 19
Gold’s Exciting Boredom - 21st May 19
Trade War Fears Again, Will Stocks Resume the Downtrend? - 21st May 19
Buffett Mistake Costs Him $4.3 Billion This Year—Here’s What Every Investor Can Learn from It - 21st May 19
Dow Stock Market Trend Forecast 2019 May Update - Video - 20th May 19
A Brief History of Financial Entropy - 20th May 19
Gold, MMT, Fiat Money Inflation In France - 20th May 19
WAR - Us versus Them Narrative - 20th May 19
US - Iran War Safe-haven Reasons to Own Gold - 20th May 19
How long does Google have to reference a website? - 20th May 19
Tory Leadership Contest - Will Michael Gove Stab Boris Johnson in the Back Again? - 19th May 19
Stock Market Counter-trend Rally - 19th May 19
Will Stock Market “Sell in May, Go Away” Lead to a Correction… or a Crash? - 19th May 19
US vs. Global Stocks Sector Rotation – What Next? Part 1 - 19th May 19
BrExit Party EarthQuake Could Win it 150 MP's at Next UK General Election! - 18th May 19
Dow Stock Market Trend Forecast 2019 May Update - 18th May 19
US Economy to Die a Traditional Death… Inflation Is Going to Move Higher - 18th May 19
Trump’s Trade War Is Good for These 3 Dividend Stocks - 18th May 19
GDX Gold Mining Stocks Fundamentals Update - 17th May 19
Stock Markets Rally Hard – Is The Volatility Move Over? - 17th May 19
The Use of Technical Analysis for Forex Traders - 17th May 19
Brexit Party Set to Storm EU Parliament Elections - Seats Forecast - 17th May 19
Is the Trade War a Catalyst for Gold? - 17th May 19
This Is a Recession Indicator No One Is Talking About—and It’s Flashing Red - 17th May 19
War! Good or Bad for Stocks? - 17th May 19
How Many Seats Will Brexit Party Win - EU Parliament Elections Forecast 2019 - 16th May 19
It’s Not Technology but the Fed That Is Taking Away Jobs - 16th May 19
Learn to Protect your Forex Trading Capital - 16th May 19
Gold Ratio Charts Offer The Keys to the Bull Market - 16th May 19
Is Someone Secretly Smashing the Stock Market at Night? - 16th May 19

Market Oracle FREE Newsletter

U.S. House Prices Analysis and Trend Forecast 2019 to 2021

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

© 2005-2019 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

6 Critical Money Making Rules