Friday, November 11, 2011

Why the Oil Price Nearing $100 per Barrel (Again) is Such a Big Price Inflation Warning

U.S. light crude futures traded 91 cents higher today at $98.69 a barrel after touching intra-day highs of $98.78 a barrel, and having closed at a 15-week high of $97.78 the previous session.

Both Brent and West Texas Intermediate futures are now in "backwardation," meaning the front-month prices are higher than future months. This futures structure is generally a sign of tight supplies in the here and now.

The climbing oil prices should not come as a surprise given the aggressive money printing by the Fed (M2 is growing at roughly 15%). Oil often leads prices higher, since it is used by both capital goods industries and at the consumer level---unlike, say, popcorn which only faces demand at the consumer level or a cement which is only demanded by the capital goods sector.

Oil, however, is used across the board in the capital goods sector, and by consumers for leisurely travel. Since Fed money printing is about pushing money into the capital goods sector, this means the capital goods sector has more money by which to bid oil away from the consumer sector. Viola, oil leads climbing prices. As the newly printed money works its way through the economy and starts to find its way back into the consumer sector, consumer goods overall start to climb.

Fed chairman Bernanke can call a climb in the price of escargot transitory, if it is the only thing climbing, but calling an increase is oil prices transitory, as he did yesterday, makes him one ballsy forecaster, and in time we are likely to plaster these comments next to those where he stated the start of the housing crisis that it appeared limited to the subprime market.


  1. Looks to me like he's setting up a defense for the Fed to continue printing money in the face of rising core CPI--as long as unemployment remains elevated. Quite the feedback loop.

  2. maybe the fact that iran/isrel are going to go at it


  4. Again...The banksters NEED higher inflation to write-down gubmint debt ratios. They are finding it hard to steal more from working people using taxes so they are forced to use inflation. The alternative is bankruptcy - but why would any counterfeiter resort to that?

  5. no worries

    I hear we're sending troops to Nigeria now. Maybe we can just take their oil.

  6. Anon 4:47,

    I think you mean Iran/Israel/US (possibly Syria, China and Russia). The State of Israel won't do a thing without the US to hold their hand and/or carry the weight of the more significant burdens.

  7. Keep in mind that central bankers in the US and UK are absolutely pining for inflation. They just dare not say this publicly, but of course its true. I've seen plenty of articles by economic commentators talking about how a few years of 5% or 6% inflation would do wonders in terms of inflation away debts. In the UK, we are already there in fact! Of course, responsible savers are hit hard by this, but than again, do the central bankers really care about savers and pensioners more than the big banks??