How attributable to QE2 is the rapid rise in the price of oil? I think it is heavily attributable to it, as the decline in the dollar given the massive expansion brought on by QE2 will continue to cause oil to balloon given the fact that it is priced in dollars.
What does everyone think?
I agree.
The usual proof is the following, which I read Rothbard make.
The average Joe has only so much money in his wallet every week to spend. If oil prices go up and he pays more for it, there is less money to buy something else. So by the law of supply and demand, if oil goes up, something else must go down.
How then do we account for everything going up lately? Gold, silver copper, corn, cotton, in fact all commodites are going up. As is food [as McDonalds has announced] and everything for sale in Walmart [as they announced]. The stock market, foreign currencies, all are going up. [Only housing prices are dropping because they were too high to begin with]. All this with Depression level unemployment, if we use the same calculations used back then.
So there are more unemployed, yet prices of everything is going up. The only possible answer is that more money has been printed, and by supply and demand, its purchasing power has diminished.
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It's easy to refute an argument if you first misrepresent it. William Keizer
I wondered, aren't oil prices always calculated in Dollars, even if they're paid in another currency? So when the Japanese pay for Russian oil with yen they still pay for the inflation of the US Dollar?
I'm not so sure it is QE2 per se. Certainly inflationary policy has a lot to do with overall rising commodity prices, but not so recently as QE2. And oil has been going up irregularly in terms of gold at least as far back as late October...1.7 grams/barrel then, to 2.11 g/barrel today. That's a greater than 24% increase in less than 6 months...in real money.
Obviously there are real world factors of supply and demand at work that are causing the value of oil to go up....or the value of gold to go down. Honestly I'm not really sure what to make of it completely. In terms of silver, oil has gone down in that same time frame...from around 3.5 oz/barrel to 2.41 oz/barrel today...a decline of over 31% in less than 6 months. ANYONE HAVE AN EXPLANATION?
I don't have enough knowledge of the current markets to be able to try to explain that. But as for commodities in general, have a read here for a really insightful look.
I don't think we have really started to feel the true effects of QE2 right now. Money velocity is very slow these days: it's been too soon since Bernanke went on his more recent spending spree. But in 2008 we had one of the largest monetary base expansions in recent history: everybody, from the US Federal Reserve to the Bank of England, printed like there was no tomorrow. There's a hot debate (which I am happy to leave to others) about how long it takes for newly "printed" money to enter the real world and start affecting prices. In short there's an enormous mass of pented-up liquidity which is starting to break the dam: it started to trickle through at the end of 2009 and now the trickle is quickly turning into a flood. The annoucement of QE2 last Fall only accelerated things: investors (including yours truly) saw this as a sign of continual monetary and fiscal lunacy on part of the Fed and the US government and acted accordingly. Problem is the main alternative (euro) has big issues of its own: while the euro gained substantially against the US dollar it took a beating against other more stable currencies like the Swiss franc and the Australian dollar. In such a climate it's obvious investors are turning to those commodities "everybody" wants: oil, rice, cotton etc. The recent troubles in the Arabian world (far from over) only exacerbated things. Bad weather in India and cold weather in South America have done the same for agricultural commodities.
And right now there's a problem: oil consumption in Europe is declining dramatically. It started a long way back with the loss of about a third of the refining capacity over thirty years (mostly due to the replacement of heavy oil with cheaper and cleaner natural gas) and took a downturn starting in 2008. Well over half of Europe's freight travel by road and as lorries pile up less miles they also need less fuel. People have started using cars less and/or filling up as little as possible; fuel thefts are on the rise. In 2009 and 2010 oil use in Europe declined by 9%. This year, judging by some indicators ( for example how often service station are resupplied) the tend will continue. Some companies are already thinking about shutting down more refineries and import refined fuel from the Middle East and North Africa. Of course it could be argued India's and Cina's increased consumption could make up for that but not in the immediate. Both countries (especially China) have refining capacity "bottleneck": they can only refine so much oil monthly. New plants are being built but it will take time. And nobody wants to have tankers queing up like it happened at Port Everglades when Hurricane Katrina hit: having those things sitting idly fully loaded cost major money. That's why a correction in oil prices will arrive. It won't be major like in 2008 when they came tumbling down but it could be an opportunity.
So you're saying that, rather than QE2, it's just the money that the Fed flooded the market with in the wake of the financial collapse that's devaluing the dollar and contributing to the oil spike? And also, once refining capacity increases we'll see a decrease?
It was liquidity already floating around which found its way into commodities, yes. Oil was on a ride before Bernanke announced QE2 and troubles broke out in North Africa and the Middle East. These two last factors only exacerbated the problem.
As for the correction, it will be physiological. Too many people have bought oil futures while supply and demand stay more or less stable. Futures have an "expiry date" on them, you cannot hold to them indefinetely hoping price will soar forever. Investors demand returns. Right now any correction will be slight, simply because there are troubles brewing in Saudi Arabia. But it will happen. A major correction won't be in the books until something drastic happens.
Oh ok. That makes sense. My boneheaded friend who knows nothing about economics just wrote on my facebook the following quote:
"The oil price rise is rampant speculation by the market and price gouging by the oil companies. In 2008 oil spiked to 140 a barrel and gas wasn't this high. Market prices fluctuate based on supply, demand and inflation. The recent surge in gas prices is not a result of any of those. It is also not a result of gov't intervention. Capitalism is good, but the market isn't always right." How would you respond to that? Debating him is like debating a brick wall.
WallStreetAce:How would you respond to that? Debating him is like debating a brick wall.
People who know nothing and think they know everything frequently come off like that.
He claims "gas wasn't this high" in 2008. At it's height back then, he's right. In 2008 it was higher...as one would expect with higher crude prices. Just tell him to look at a damn chart and get his facts straight. Prices for U.S. All Grades All Formulations Retail Gasoline Prices (Dollars per Gallon) got up to an average of $4.16. Right now they're at $3.93.
So I would respond by saying something along the lines of "I don't quite see how you expect anyone to believe your assessment about the causes behind price changes in the most valuable commodity in the world, when you don't even know basic facts about what the price even was or is."
Here's a nice little line graph he can look at. And if he needs the specific weekly data (because the chart only looks like it goes up to $4.12) he can go here and get it himself. I have no f-ing patience for people don't even bother to know the facts of what they're talking about, let alone make idiotic and uninformed assessments.
If the dollar loses it's status as the world's reserve currency and oil unpegs from the dollar, then you can expect prices to increase higher and faster than they are now. China's starting to unload dollars (or at least they plan to), and more than a few of the major oil producing countries have stated their position to move away from the dollar. It will be interesting to see what would happen if everything switches over to gold, but that wouldn't be good news for the dollar.
Got to also remember, for those wondering why other commodities and goods go up when oil goes up, that the price of oil is a factor in the price of those goods either in terms of production or transportation. As oil increases, everything tends to increase. This would be true regardless of which currency or commodity oil trades at.
That's why the Fed ignoring the inflationary movement of energy and food prices in their metric for inflation seems to be so disingenuous.
John James: I'm not so sure it is QE2 per se. Certainly inflationary policy has a lot to do with overall rising commodity prices, but not so recently as QE2. And oil has been going up irregularly in terms of gold at least as far back as late October...1.7 grams/barrel then, to 2.11 g/barrel today. That's a greater than 24% increase in less than 6 months...in real money. Obviously there are real world factors of supply and demand at work that are causing the value of oil to go up....or the value of gold to go down. Honestly I'm not really sure what to make of it completely. In terms of silver, oil has gone down in that same time frame...from around 3.5 oz/barrel to 2.41 oz/barrel today...a decline of over 31% in less than 6 months. ANYONE HAVE AN EXPLANATION?
Random thoughts:
1. I guess a situation such as you describe tells us that gold and silver are not rock solid fixed measuring sticks, like an inch or a liter.
2. What you are describing looks like an increase in demand for oil more than for gold, and for silver even more than that.
3. I imagine there is a common engine driving all three, the desire to get out of the dollar.
4. http://www.youtube.com/watch?v=3rWQdGtCh7s
I'm not going to get into a rant about the role of speculation, but speculation cannot be blamed for the price of oil in 2008 (146$/gallon). The futures price was lagging behind the spot price.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
I've given up trying to debate with the guy. It truly is like talking to a brick wall. You'll never get anywhere. With that said, I thought this little tidbit is shocking: I made an excel chart that displays the price of crude on one axis and then the dollar index on the next axis over the past four years, and the two are so negatively correlated it's sad. When oil ballooned three years ago the dollar was at an all time low, and now its approaching that all time low again, according to the graph. I then ran Excel's correlation function and the results confirmed my observation: a perfect -.5. That's crazy. The Fed's just destroying the dollar and we're all suffering because of it.
Think you could upload that file?
I tried but it won't upload. Do Word and Excel files not work? If so, that really sucks.
Two things you could do:
1) Put it in a .zip file and upload that (you'll find your files here.) Then send me a PM and lemme know it's there.
or
2) use a site like speedyshare.com, or megaupload.com, or hotfile.com and upload the file there, then paste the link here in the thread.
I'll try to post it sometime this weekend, as I'll be extremely busy with schoolwork tonight and tomorrow. But it will be up.
Where is the file? :)