Inflation is caused by only one occurrence: people demanding more money than the worth of their output. If governments monetize those demands to keep interest rates from rising, you end up with ever increasing demands for compensation from people trying to protect themselves from inflation. The Central Bank ends up breaking the cycle by introducing the inability to get inflationary wage demands satisfied.
The total or potential supply of oil doesn't determine its price. The marginal supply and demand fully do. The marginal supply will slowly decline while the marginal demand will slowly increase. So the price will slowly increase. The price could rapidly increase for a brief time due to exogenous shocks from oil producers. The shocks would be of the nature of non-economic justified shutting-off of supply.
I believe that the actions being currently implemented will cause oil to rise to $20/bbl within one year. Part of this will be due to price recovery boosted by Asian economic stabilization. Like the yen oil has been bid down by the market game below its normalized price. This will be corrected in coming months.
This author says more accurate things about the past than most, but as usual, there is this tendency to grind the ax. When the grinding occurs, you get distortions trying to prove some untenable idealist position. I'll assume the author means money everywhere the word currency appears. The author claims that over creation of money causes inflation. There have been extended periods of money creation that have been attended by low or no inflation. If the people save the money or invest it, you don't get demands for goods and services in excess of the ability to supply. If society has instituted laws encouraging easy increases to the ability to supply, excess money causes additions to supply more than they add to price, so little or no inflation occurs. If society punishes the ability to supply and then generates excess money to contain borrowing costs, the excess money goes into the bidding up of prices including that of oil. Oil will maintain its relative value against all other commodities, but the monetization of excess demands for compensation doesn't directly cause the price of oil to rise. In fact, if the intrinsic deflation is in place, excess money creation makes oil fall because the interest rates rise more rapidly in fear of inflation and economic activity slows. Oil consumption is proportional to GNP. Fiat oil price increase does not cause inflation. It takes some time but all goods and prices rise proportionately over time to the price increase of oil.
I can't figure out if the author thinks oil will rise or fall. He seems to assert both to prove his point which is unclear anyway. Obviously the price of oil rises and falls. So what? |
