So why has oil risen so wildly? The answer…The Fed.
I saw this article come out today and felt it hit the nail right on the head. I realize that most consumers feel lower interest rates are better for the economy. However since the Fed took so long to reduce their rate, they were basically forced to overreact when they finally moved on it.
When the Saudi government agreed to increase oil production over the weekend (not an act of kindness, just them looking out for their long term best interest) the price per barrel did not drop dramatically this week. That is a clear sign that this is not a supply / demand issue. There are no gas lines; we do not have to ration fuel. The supply is fine. The hedge funds and the weak US dollar have created the high price of oil. This article does a nice job of explaining this in detail.
The evidence is too clear to ignore. Let’s take a look at where we were before the first Fed cut on September 18th. The Fed Funds Rate was at 5.25%, Oil was at $73 per barrel and the Euro was $1.35. Not great, but not bad. Fearing a recession, the Fed did the right thing to stimulate the economy - they cut. But cutting rates in the US makes higher rates in Europe appear much more attractive. So the Dollar began to tank against the Euro and just got worse as the Fed continued to cut. Now it takes $1.56 to equal one Euro. That is a huge swing. And here is where it gets interesting…Oil is priced in Dollars, so as Dollars decline, Oil price per barrel must rise. Oil has gone from $73 a barrel before the Fed cuts to yesterday’s close of $137 a barrel. (Today $134.55)
Again, oil prices are surging mainly because of the Dollar weakness and the Fed cuts. Think about it - has demand for oil suddenly skyrocketed in the past 8 or 9 months? Sure it has gone up, but oil had already doubled in price when it was at $70. And higher prices for oil hurts everything. Sure at the pump and for heating, which allows less to spend, but travel, manufacturing, shipping…the list goes on and on.
