Gordon Brown thinks he knows

On the price of oil Gordon Brown thinks…

The cause of rising prices is clear: growing demand and too little supply to meet it both now and – perhaps of even greater significance – in the future. Higher demand is one of the major results of the scope, speed and scale of globalisation as Asian economies, as well as Opec countries themselves, demand more oil.”

Nothing I’ve read suggests that this is the case (See my earlier post below and the bloke from Shell saying “it’s not shortages”).

This graph shows there is an increasing trend in the price of oil since 1996. But I can’t believe that the move from less than $60 a barrel a year ago to over $135 a barrel earlier this month is due to demand from China and co. Has the Chinese economy really changed this much in the past 12 months? I don’t think so.

I’m no economist but…

…the view I’m more inclined to believe is that it’s related to the fall in the value of the dollar (graph vs euro above (subject of an earlier post too)) and commodity speculation. With US interest rates low, to counter the credit crisis, the dollar can only remain low. The mild irony is that the high price of oil is an inflationary pressure (along with rising food prices). In response to the threat of inflation the Fed will/might raise interest rates (except the US economy is heading into recession; not a scenario for increasing interest rates). Rising interest rates will reverse the fall in the dollar and the price of oil will settle back, perhaps not as low as before but lower than they are today.

How’s that for some DIY economics? Naturally I like my theory better than Mr Brown’s.

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