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99 comments on Can A 'Shadow OPEC' of 'Global Guerrillas' Set Global Oil Prices?

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Hellasious on June 18, 2008 - 12:33pm Permalink | Subthread | Comments top

About oil prices.

While oil may not be coming out of the ground quite as fast as demand requires, the main reason for the rapid rise in prices is another: there are way too many dollars around (aka debt and monetized assets) and oil prices finally caught up to this reality. As Milton Friedman said: "Inflation is always and everywhere a monetary phenomenon".

As such, the real "oil terrorists" are the banking and monetary system, in the classical sense and the newer, "shadow" version. You cannot flood the world with "funny money" and expect cheap oil - or cheap anything, for that matter.

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Cslater8 on June 18, 2008 - 12:53pm Permalink | Subthread | Parent | Comments top

In support of your position, as the US debt increased by an average of 1/2 a trillion a year (5.4 trillion in 2000 and now 9.4 trillion almost 8 years later = 1/2 trillion more debt per year) the value of the Dollar has plummeted in comparison to the Euro. If the Dollar has maintained its value in relation to the Euro, the price of a barrel of oil would be 72 dollars, and the price at the pump would be approx. 2.50 a gallon.

What we heard at the time was the argument that the debt increase was a small percentage of GDP, and any argument against this minor increase in debt was purely political. Well, here we are just 8 years later with a dollar that's worth so much less in comparison to foreign currencies that we are paying the price at the pump, the grocery store and everywhere else.

So the next time someone makes the argument that deficits don't matter (Cheney), the public should be up in arms. Giving away three huge tax cuts to the super wealthy at the expense of the currency due to increased long term debt, is a foolhearty policy.

Not to negate Peak Oil, which is real and will continue to be a problem, but monetary policies in this case where such a big factor in the price for fuel, that we must be vigilant against Administrations that only consider short term benefits for their base.

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dratman on June 18, 2008 - 2:41pm Permalink | Subthread | Parent | Comments top

Right now it can only be counted as a good thing for the price of oil to continue rising at a rate sufficient to alarm people everywhere, yet preferably not quite at a rate which induces great numbers of them to panic.

Our only (perhaps forlorn) hope of avoiding overwhelming chaos over the next several decades is for people around the globe to become sufficiently worried that they start working together, pro-actively, to reorganize for some kind of minimalist survival until the population slowly begins to drop by way of reasonably acceptable forms of attrition.

We now need to reach the mentality of a Battle of Britain. Every minute we waste accumulating short-lived status and wealth brings us closer to the worst imaginable scenarios of human destruction.

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research24 on June 18, 2008 - 5:26pm Permalink | Subthread | Parent | Comments top

There is a big hole in the inflation argument. If you adjust the current price for inflation and say that oil should be at $72 inflation adjusted, then you also need to inflation adjust incomes, which no one ever does.

In other words, if oil were at $72 you would also have fewer dollars with which to buy your fuel, so the $72 oil would be just as dear as $135 oil. Assuming, of course, that your income has at least kept up with inflation. If not, you're declining income is a bigger problem than rising fuel costs.

Its the same silly arugment people make when they say, "remember when gas was 25 cents a gallon!" Yeah, I do, but I was only making $2.50 an hour at the time!

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wkwillis on June 19, 2008 - 1:33am Permalink | Subthread | Parent | Comments top

I would be happy to be making 90,000$ per year in my present postition. Count me in!

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Brad on June 18, 2008 - 1:17pm Permalink | Subthread | Parent | Comments top

I'm not sure I understand that argument. If inflation is a "monetary" phenomenon I would expect that the destruction of credit markets, and the evaporation of wealth--both on the consumer and the financial end would lead to something "other than inflation" [don't speak the "d" word].

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Hellasious on June 18, 2008 - 3:34pm Permalink | Subthread | Parent | Comments top

The banking and monetary authorities are fighting deflation as hard as they can. Just look at what the Fed alone has done to avert it. There has been very little outright debt destruction so far - that's the point.

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JimFive on June 18, 2008 - 2:29pm Permalink | Subthread | Parent | Comments top

If you accept Friedman's remark then you also have to realize that not all price increases are inflation. Any price increase that is out of bounds (as the oil runup has been) cannot be explained by inflation. It has to be explained by market forces i.e. reduced supply or increased demand.
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JimFive

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Hellasious on June 18, 2008 - 3:58pm Permalink | Subthread | Parent | Comments top

Thought experiment: The Fed decides to reduce total money supply by 10% tomorrow. What do you think oil prices would do?

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JimFive on June 19, 2008 - 3:38pm Permalink | Subthread | Parent | Comments top

Hellasious,
Oil prices would not decrease 10% and stay there, which is what you are implying. They would decrease some percentage of that 10% and remain volatile. Since the volatility in the past few weeks has been on the order of 5% per day it is unlikely that we would be able to measure the real effect of that change.

Some amount of oil price changes can be explained by a weak dollar (again, not necessarily caused by inflation). Some amount of the oil price changes can be explained by monetary policy (basically inflation). But primarily oil prices can only be explained by market forces. Supply not keeping pace with demand.

My point is that if you use the definition of inflation that Friedman is using, "expansion of the money supply" then you cannot call all price increases "inflation". You also cannot then measure inflation by those price increases. Doing so is a form of the fallacy of ambiguity. As I said in my previous post.

Any price increase that is out of bounds cannot be explained by [should have written "as"] inflation

Finally, There has been some amount of destruction of the money supply due to foreclosed loans (Paid off loans also destroy money, but that is scheduled). The Fed, as you have noted has tried very hard to offset that destruction by lowering interest rates. That gives us three possibilities:
1. The money supply has shrunk by some amount
2. The money supply has remained roughly the same
3. The money supply has grown by some amount

In both 1 and 2 we would expect there to be no or downward pressure on the price of oil. In the case of 3 we are assuming that the work of the Fed has been more than successful in offsetting the destruction due to the housing "crisis" that it pushed oil prices through the roof, but yet is somehow still more concerned about a lack of available credit than it is about inflation. That seems to me to be an unsupportable position.
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JimFive

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99 comments on Can A 'Shadow OPEC' of 'Global Guerrillas' Set Global Oil Prices?

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