Oil Prices, Inflation, Interest Rates

Posted on August 12, 2005 by John Rutledge

Oil Prices, Inflation, Interest Rates
Lots of folks today saying oil prices could hit $75 in next few weeks. Truth is, over short periods, oil prices could do almost anything; they may be right.

You will be hearing people say this is the end of the world, that it will throw the US into recession, that it will increase inflation and push rates higher. Not so.

Over longer periods people adapt to oil prices. that’s why we use about half as much oil per dollar of GDP than we did when oil was cheap. And all the growth of the US economy is in the service sector where the only think you need oil for is the dressing on your ceasar salad dressing. Not saying oil doesn’t matter (Double negative? No it’s not.) Just saying we need to take a deep breath before biting down on our cyanide capsules. Loose credit markets dominate high oil prices for growth.

Regarding inflation, a spike in oil prices causes a spike in prices, not an increase in sustainable inflation. It pushes output down, not up. They know this at the Fed too. High oil prices are more likely to cause the Fed to back away from raising the Fed funds rate target than to push it higher. And bond yields (10 year Treasury is 4.26% today) will ignore the whole thing.

JR

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One Response to Oil Prices, Inflation, Interest Rates

  1. James DeLong says:
    August 13, 2005 at 9:30 AM

    I would very much like to find a good analysis of the situation with respect to oil reserves. The SEC allows companies to treat as “proven” only oil that can be extracted under current economic conditions. But does that mean $65/bbl? $35? A moving average?

    And does anyone track how much oil becomes “proven” as prices rise? Analysts say that discovery of new giants is unlikely, but, mostly, the OLD giants still hold 1/2 to 2/3 of the original oil in place. Is there a graph anywhere that shows that rate at which this becomes available as prices rise?

    In the millions of words now written about the energy situation, this sort of appraisal seems to be glaringly absent.
    Jim

    Jim,
    That’s a great question Jim. I have seen work on this but let me take a day or so and see what I can find that is current. Will post the result.
    John

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