Since I have been writing this column, “Where do you think the price of oil is going?” is, perhaps, the most asked question, next to the same question for the price of gold. My answer for the price of oil has always been the same – up.
LONDON (AFP) – World oil prices spiked to fresh two-year highs on Wednesday as traders reacted to news of plunging crude reserves in leading consumer the United States. Brent North Sea crude for delivery in February, jumped to 93.94 dollars per barrel — the highest level since October 2008. It later stood at 93.77 dollars, up 57 cents from Tuesday’s close.
Recently, I wrote three columns on inflation and the Fed, and my argument was that inflation would come sooner rather than later, even if the Fed were telling us that inflation remained low, low enough that the Fed would not consider raising interest rates any time soon. I argued that the Fed could take this position because it did not consider the price of energy or food in its calculations for inflation. I further suggested that both categories had inflated some 30% in the last two years, at least where I live in Central California and that my reality is the reality for many Americans – inflation was already here for all of us. The news above further supports my contention, and if you add to that the recent rise in interest rates, well …
I have also written recently that the price of a barrel of oil would exceed $100 before the middle of this coming year. I argued that the rise in price was inevitable; as the global economic environment improved, the price of oil would rise correspondingly, and so it has, is, and will continue, as long as the global economic recovery is still alive.
Now, since this is the Christmas season, I tend to see things on the bright side (duh!), and in this news of spiking oil prices, I see another gift. Actually, I see two. The first is more future than present, but it is exactly what I think we need to jumpstart this economy to a new level, a pace of technological growth unseen for some time in this country. The higher the price of oil rises, the quicker our innovative business culture will introduce alternative forms of energy production, which will be the technological transformation I just referenced.
The second gift is more now than future (6-12 months). The rise in the price of oil means the Fed is succeeding in its efforts to introduce inflation into the economy. Remember, I wrote that Bernanke is a Friedman economist, which means he believes deflation is far more deadly than inflation. The gift here is that the price of oil has once again become an indicator of economic improvement (true supply and demand), and as it rises, the price of food will rise, and that in turn will lead to higher prices in everything else. This is the inflation Bernanke wants to see before announcing inflation is here and the Fed will take steps to contain it. In my opinion, higher interest rates are what we need to move to the next recovery phase, but not quite yet. Give us one more year of low rates. How about it, Santa?
Trade in the day; invest in your life.
