The impact of the price of oil on the US economy.

Discussion in 'Economics' started by SouthAmerica, May 22, 2008.

  1. .
    May 22, 2008

    SouthAmerica: The skyrocketing increases on the price of oil to US$ 135 per barrel, and probably it will reach the US$ 150 level in the near future – there is one way to puncture this bubble before inflation turns into hyperinflation here in the United States.

    I know that Ben Bernanke doesn’t have the balls to do it – but if I were on his shoes right now I would raise immediately the Fed Funds rate to 4 percent, and if needed I would raise the Fed Funds rate even further to 5 or 6 percent.

    The US economy requires a shock treatment right now - and raising the Fed Funds rate by 2 percent in one shot would convey the message to the market players.

    The Fed Funds rate should be at least 4 percent anyway based on the current official inflation rate in the US.


    “Oil Rises Above $135 After Unexpected Drop in U.S. Inventories”
    By Christian Schmollinger
    Bloomberg News – May 22, 2008

    May 22 (Bloomberg) -- Crude oil rose to a record above $135 a barrel in New York on concern that supplies are inadequate after U.S. stockpiles unexpectedly dropped last week.

    U.S. crude inventories fell 5.32 million barrels to 320.4 million barrels last week, the biggest drop in four months, the Energy Department said yesterday. Gasoline supplies plunged by 755,000 barrels when analysts expected an increase.

    ``Everyone's jumped on the bandwagon,'' said Anthony Nunan, assistant general manager for risk management at Mitsubishi Corp. in Tokyo. ``There's agreement that $200 is possible and that's getting more people into the market. We have very little supply cushion going forward and that's playing into the minds of investors.''

    Crude oil for July delivery rose as much as $1.87, or 1.4 percent, to $135.04 a barrel in after-hours electronic trading on the New York Mercantile Exchange. It was at $134.62 a barrel at 11:41 a.m. Singapore time.

    Oil for prompt delivery has surged 8.5 percent in the past week while futures contracts for 2016 gained $20 to $142 a barrel.

    Brent crude oil for July settlement rose $1.80, or 1.4 percent, to a record $134.50 a barrel on London's ICE Futures Europe exchange. It was at $134.30 a barrel at 11:41 a.m. Singapore time.

    ``The price was roaring before the inventory report,'' said Rowan Menzies, head of research at Commodity Warrants Australia Ltd. in Sydney. ``That gave it the extra push.''
    Wrong-Way Bets

    Oil's rally to a record above $135 a barrel came as traders bought crude to cover wrong-way bets that prices would decline, according to data from the New York Mercantile Exchange.

    The number of outstanding futures contracts, known as open interest, fell 8.1 percent in a week to 1.36 million at the same time that prices rose 2.6 percent, the data show. Falling open interest and rising prices are signs that traders are buying to exit so-called short positions that would profit if oil fell, and lose money as they rose.

    Open interest has been sliding for months, after the number of outstanding crude futures reached a record 1.58 million on July 16, 2007.

    Crude for delivery in December 2016 ended yesterday at $142.09 a barrel, signaling investors anticipate prices will gain for years. Some traders speculate oil will reach $200 this year. The price of a December 2008 option contract that allows the holder to buy 1,000 barrels of crude at $200 each jumped 67 percent in three days to $1.72 a barrel yesterday on the Nymex.

    Goldman Sachs & Co. analyst Arjun N. Murti said in a May 16 report that ``the possibility of $150-$200 per barrel seems increasingly likely over the next six-24 months.'' Murti first wrote of a ``super spike'' in March 2005, predicting crude may trade between $50 and $105 a barrel through 2009.

    Market Supplied

    The crude-oil market is ``well supplied,'' Libya's top oil official Shokri Ghanem said yesterday, rejecting calls for the Organization of Petroleum Exporting Countries to increase production to curb prices. OPEC, which pumps more than 40 percent of the world's oil, isn't planning to meet before its next scheduled conference in September to review production, he said.

    Saudi Oil Minister Ali al-Naimi told reporters on May 16 that the kingdom is planning a 300,000 barrel-a-day output increase, to bring June production to 9.45 million barrels a day.

    Rising oil prices are starting to impact other areas of the economy, particularly the transportation sector. There are rising concerns it will impact growth as increases in fuel cause other costs to surge.

    Airlines have been hit by higher jet fuel costs. The price of the fuel, the largest expense at many airlines, has climbed 88 percent in the past year and traded at a record $4.0592 a gallon in New York Harbor yesterday.

    AMR Corp.'s American Airlines, the world's largest carrier, said it will cut ``thousands'' of jobs as it responds to high fuel prices and slowing demand.

    ``We saw this in the Seventies. You're going to get stagflation without a doubt,'' said Commodity Warrants' Menzies. ``You'll get the inflation with oil at $130 as it will feed into everything. And it's not that good for the economy so you'll get stagnating growth.''

  2. Excellent Commentary As Usual


    The recent upward oil price movement was largely due to
    short covering in oil futures contracts.

    Open interest is declining. The short sell bets above a $100
    are covering....This is the standard response in any
    security group where the orders are stacked one way.

    This is where paper mostly differs from actuals. Actuals move
    on surpluses and shortages.

    The raising of interest rates would certainly serve up the same type of scenario. The dollar short sellers would also cover
    sending the dollar sharply upward, if it were truly felt that
    the US Fed was on track to protect and strengthen the dollar.

    The message from the fed needs to be austerity and the raising of interest rates. Another helpful message would be the reversing of the consumption society to one of more industry which could be energy innovations, agricultural innovations, other technology innovations and accelerating the replacement of the oil based fleet.....the list goes on....Savings has to commence....

    As long as energy alternatives have a $50 breakeven, the oil industry will play all games between $50 and whatever the upside will allow....

    The main key about Iraq all along is the possibility of being
    the lowest cost oil producer regarding a significant portion of the
    world's oil....and this is still the case. To finish the mission in Iraq, would be to control and own the 80 cents to $1.80 per barrel
    lifting costs, which would be the control fulcrum for world oil
    prices that could be used to tame down all of the unfriendly oil producing countries....

    What is happening today is normal in the sense that the US still
    does not have this control, and has only incurred more losses....

    Excellent and insightful commentary , South America....