Oil prices always jump when the Fed wants to warn against inflation
Yes, this has nothing to do with real estate. It's my own little conspiracy theory (and I know quite well I'm proposing a perception, not fact), but crude oil prices always seem to spike when the Fed wants the public to feel the tangible pain of inflation through higher oil, and subsequently, gas pump prices. It happens when the markets are pressuring the Fed to lower interest rates... oil prices jump and the Fed tells "consumer nation" that inflation is a REAL problem that affects their pocketbooks. And they drop when there's a crisis like last month's credit market swoon... almost to downplay the "inflation spectre" that would have aggravated the credit crisis even further.
Today's 1/2 Fed Funds and discount rate cut coincides with soaring record crude oil prices - they have jumped 60% from $50 to $80+ over the past nine months (note there is seasonality and prices are generally lower in the winter). It's as if the message from the Fed is - "yes, we dropped the interest rates because we have honorable intentions to stave off recession but hey, inflation is still a bugaboo... look at the oil prices, so don't even think we're dropping rates indiscriminately". The main reason to account for this month's oil price surge is the interest rate cut will spur the US economy and create more global demand for oil.
So I was intrigued to see this article about how NYMEX traders seem to be scamming the oil market in order to maintain higher oil prices. I don't know anything about oil trading so the article may not even be credible... the main point here is gas prices are the most visible daily-use product indicative of inflation to the consumer. When they are high, the consumer notices immediately (we all track gas prices). As a consumer benchmark for the economy, it's easy to conceive that oil prices can be manipulated for political purposes. Watch them drop before the presidential election next year!
Update 9/19 8:00am: CNBC and its commentators discuss "Is inflation dead?". How did the perception of inflation as an economic risk suddenly die down in only six weeks when the FOMC thought it was a huge problem? Although opinions were mixed, the market seems to be buying into this. All housing related stocks are off to the races today.
The only problem with this theory is that oil is a global fungible commodity, meaning that it isn't subject to manipulation by any individual party (that is unless you want to drive it up by committing a catastropic act of terrorism or by starting a war in the Middle East, for example).
If the U.S. were able to manipulate prices at will then it surely would push them in the opposite direction - down - which would significantly inprove our trade balance and have the additional benefit of deflating the sails of our friends in Caracas, Tehran and Riyadh.
Just my two cents. Good to see a slightly off-topic post...a rare occurrence here on transparentre!
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Thanks for the more transcendent overview on the topic Chris... I'm realizing it's fun to spout off on stuff I don't know about just so I can hear a cogent opinion.
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Pat - I love conspiracy theory posts - however; the rate cut could actually drive oil prices higher on fears of unchecked inflation/deflation/stagflation (you-name-it-ation) that results from the weakening dollar, etc.
We're looking at $83 today - how high will we go?
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The higher oil prices are consistent with what the Fed really wants to do - keep interest rates by saying inflation is a threat. Oil prices are too easily manipulated by factors seemingly out of our control, like OPEC... but that's where the conspiracy may exist... does OPEC collude with the Fed and the central banks? Suppose the Fed is giving OPEC the green light to tighten supply?
9/22/07 9:00am update: I realize the jumping oil prices is the direct consequence of dollar devaluation - oil prices are being repriced higher due to the lower dollar valuations.
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