Summary
The article points out that oil has risen above $78 despite the fact that the US maintains an inventory surplus, but that gasoline supplies fell over the past week.
As most of us know the US government's monetary policy is based on a weak US dollar in the hopes of stimulating trade and breaking the credit jam.
Analysis
There is however a trade off in a weak US dollar. The majority of commodities are dollar denominated. A weak dollar means that these commodities such as oil are less expensive for non-dollar investors.
So part of the oil price rise may be attributed to the weak dollar and the corresponding stock surge. It may also be attributed to increasing demand from countries such as China, which is known to be building its strategic oil reserve in anticipation of improving global economic conditions in may countries, as well as an aggressive push in international oil Exploration and development.
However, this is not necessarily good news for the US economy. Increased oil prices may translate out to higher costs of diesel and gasoline at the pump. Especially if reported reductions and shut downs in US refining capacity are correct and go forward. Higher oil prices also may translate out to higher production costs in plastics, chemicals and agriculture. Raising the specter of inflation, even as we continue to see increases in unemployment and increasing deficits.
It should also be remembered that technical analysts predicted that oil could rise to $100 and certain OPEC members have said they would be comfortable with $90 by 2010.
Should this pattern continue, we may also see the real possibility of the dollar replaced as the worlds reserve currency. Discussion and proposals for this have been made by several other nations including, but not limited to Russia, China, Brazil, Venezuela, and Arab bloc members of OPEC.
Such a move and success is probable unless the US manages to stem its dependence on deficit spending and free money. The impact would then be that
the US would be at a competitive disadvantage and the standard of living would be compromised.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
