If you have been reading the mainstream press recently, you will find reasons such as these for the recent surge in oil price:
- Tensions in northern Iraq
- Supply concerns in Mexico due to tropical storms
- Violence in Nigeria’s oil producing region
- Falling US dollars
- Lack of credibility in OPEC to raise oil production
Likewise, you will find news reports saying that gold price has been surging due to the weak US dollar, stock prices are rising due to the market’s anticipation for interest rates cuts, price inflation is growing due to overheating economy, food prices are swelling due to climate change, and so on.
What is the common denominator for all these surge in prices?
As you would have guessed by now, the common theme among all these explosion in prices is monetary inflation (aka ?printing? of money). We said before in How is inflation sabotaging our ability to measure the value of things?,
Now, let come back to measuring the value of oil. Since oil is priced in US dollars and if the supply of US dollars can be expanded and contracted at will by the Federal Reserve, how useful do you think it is as a calibration for measuring the value of oil?
Thus, in the context of monetary inflation, explaining the movement of prices via the traditional supply-demand analysis only can produce nonsensical ?explanations.? No doubt, some of the rise in prices are justifiably due to supply-demand fundamentals. But when monetary inflation is thrown into the mix, all these price movements will be severely distorted. Such distortions create false price signals, resulting in widespread economic miscalculations and perceived dissonance between what the prices should be and what it is. When that happens, you will see the likes of asset managers (or money shufflers) shifting money from one asset class to the other (see Analysing recent falls in oil prices?real vs investment demand).
Now, gold and oil are the current fashion rage of the money shufflers. Therefore, we would not be the least surprise if the winds of fashion rave changes direction.