Skip to main content

Oil: inflation meets tight supply

Gazprom's prediction of $250 oil came right on time for today's post topic: the factors behind behind steadily rising oil prices.

Last month, as oil moved up to $120 a barrel, we offered a wrap-up (with help from Jim Rogers, Bill Powers, and Matthew Simmons) of some of the factors fueling the nine-year uptrend in oil prices.

Now that volatility in the crude oil market is increasing, with large daily price moves quickly becoming the norm, many traders and market watchers are wondering if we've reached a top in oil prices.

Still, others wonder if prices can continue to surge higher on the growing realization that world oil production may in fact be peaking.

Which brings us to our latest update of the oil discussion. Is the current oil price a reflection of increased speculation, inflation, a weak dollar, or a function of supply and demand?

Paul van Eeden recently addressed these points in a recent BNN tv appearance and in an article entitled, "Sue OPEC".

According to Paul, the recent run up in oil prices over the thirty-some years is largely a function of increased money supply (by the Fed and other central banks) and the ensuing inflation that has taken place over that time frame.

He notes that supply and demand fundamentals have certainly played a key role in driving the price of crude oil, but that the vast majority of this longer-term increase in oil prices is simply a matter of the dollar price of crude oil catching up with the ongoing expansion of money supply (inflation).

Watch as Paul tries to explain this point to the CNBC shills, who try to deflect van Eeden's explanation with smug retorts and 3-on-1 questioning tactics. Sorry kids, no dice. This was like watching a bunch of bush-leaguers trying to pitch to Mickey Mantle.

Now just about every article I read seems to offer the view that high oil prices are "contributing to global inflation". This is incorrect. High oil prices, as Paul explains, are largely a reflection of US and global monetary inflation. They are an effect of inflation, rather than the cause.

This is true not just for oil, but for many commodities where limited supplies are met by rising demand and a torrent of fiat paper money chasing scarce goods.

As Adam Hamilton explains in, "Money Inflation":

"Today something like 2/3rds of the world’s population is starting to strive to live and consume like we blessed few do in the first world. Yet the world’s commodities-producing infrastructure was never designed to cope with such immense and fast-growing demand. It will catch up eventually, but prices will have to rise and stay really high for a long time to entice enough new capacity online to supply increased consumption.

So even if we were on a gold standard with no fiat-paper inflation whatsoever, commodities prices would still have to rise tremendously. But to have such a fundamental secular bull coincide with massive monetary inflation is incredible. Relatively more dollars bidding on relatively fewer already-fundamentally-scarce commodities is going to seriously amplify these bulls."


Check out Hamilton's article for a great, easy-to-understand explanation of monetary inflation and the fundamentals driving the bull market in commodities. Between Hamilton's and van Eeden's articles, you'll get an informative look at some of the true reasons behind rising oil and commodity prices.

Remember: Inflation + tight supplies & rising demand = higher prices.

Popular posts from this blog

Seth Klarman: Margin of Safety (pdf)

Welcome, readers! Signup for free email updates at the Finance Trends Newsletter . Update: PDF links removed due to DMCA notice. Please see our extensive Klarman book notes below. New visitors, please check the Finance Trends home page for all new posts. Here's something for anyone who has been trying to get a look at Seth Klarman's now famous, and out of print, 1991 investment book, Margin of Safety .  My knowledge of value investing is pretty much limited to what I've read in Ben Graham's The Intelligent Investor (the book which originally popularized the investment concept of a "Margin of Safety"), so check out the wisdom from Seth Klarman and other investing greats in our related posts below. You can also go straight to Ronald Redfield's Margin of Safety book notes .    Related posts: 1. Seth Klarman interviews and Margin of Safety notes     2. Seth Klarman: Lessons from 2008 3. Investing Lessons from Sir John Templeton 4.

Slate profiles Victor Niederhoffer

Slate's recent profile of writer/speculator, Vic Niederhoffer has been getting some attention from traders and finance types in recent days. I thought we'd take a look at it here too, to offer up some possible educational value from Vic's experiences with trading and loss. Here's an excerpt from Slate's profile of Victor Niederhoffer : " I've enjoyed getting your e-mails. It sounds like you've thought a lot about being wrong. Well, the reason you contacted me, to call a spade a spade, is that I'm sort of infamous for having made a big, notorious, terrible error not once but twice in my market career. Let's talk about those errors. The first was your investment in the Thai baht, which pretty much wiped you out when the Thai stock market crashed in 1997. I made so many errors there it's pathetic. I made one of my favorite errors: "The mouse with one hole is quickly cornered." That is key. There are certain decisions you make in li

Clean Money - John Rubino: Book review

Clean Money by John Rubino 274 pages. Hoboken, New Jersey John Wiley & Sons. 2009. 1st Edition. The bouyant stock market environment of the past several years is gone, and the financial wreckage of 2008 is still sharp in our minds as a new year starts to unfold. Given the recent across-the-board-declines in global stock markets (and most asset classes) that have left many investors shell-shocked, you might wonder if there is any good reason to consider the merits of a hot new investment theme, such as clean energy. However, we shouldn't be too hasty to write off all future stock investments. After all, the market declines of 2008 may continue into 2009, but they may also leave interesting investment opportunities in their wake. Which brings us to the subject of this review. John Rubino, author and editor of GreenStockInvesting.com , recently released a new book on renewable energy and clean-tech investing entitled, Clean Money: Picking Winners in the Green Tech Boom . In Clean