All eyes on oil now
Written by A Forex View From Afar on Sunday, September 07, 2008Crude oil is slowly becoming a very important factor for every central bank when setting its monetary policy. At the crossroads between inflation and growth, oil is becoming a traffic light.
Most central bank forecasts are based on oil remaining at the current price over the coming period. However, even though oil has dropped 27 percent from the record $147.27 reached July 11, some analysts are still saying the price of crude oil will go up once again, even faster than some may think. Arjun Murti, an analyst from Goldman Sachs who predicted even from March 2005 that oil prices will rise exponentially over the following years, still thinks oil has room to go up, to the upside, this year and into 2009.
If oil does rise, once again, then we may see another round of inflation. However, this time it will be materialized in second round effects. Furthermore, inflation will erode any growth signs the economy may produce.
Nonetheless, one should ask how likely is it that oil will spike up once again to $150? The theory behind this move is demand from emerging countries, mainly China, will stay strong in the following periods. The problem is that the Chinese economy is already showing signs of overheating, just like other emerging countries. It should be added that emerging countries have big problems when it comes to inflation. Due to the unique local market, a very dynamic wage setting behavior and low competitive business environment is not uncommon to see emerging countries running double-digit inflation.
Whatever the outcome may be, we can only hope we do not see another period like in the 70’s, characterized by stagflation (no growth and a high degree of inflation).
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