05 Dec 2014

The Fed and Falling Oil Prices

Oil, Shameless Self-Promotion 11 Comments

This seems like an obvious point, but I haven’t seen anyone else make this connection? Anyway at IER I talk about falling oil prices.

An excerpt (not having to do with the Fed angle):

Whenever oil prices shoot up sharply, causing gas prices at the pump to rise as well, people “in the know” talk matter-of-factly about the greedy speculators and Big Oil ripping motorists off. When the price rise is particularly steep and sustained, even Congress and regulators get involved, since nothing ensures efficiency and the consumer protection like a federal investigation.

So let’s all burn the present episode into our minds, to serve as a counterweight the next time global forces of supply and demand push up crude oil prices. In particular, U.S. gasoline prices have fallen along with crude

11 Responses to “The Fed and Falling Oil Prices”

  1. Andrew_FL says:

    Bob, having read your article, it seems like, in your view, the recent decline in oil prices is demand driven. But surely the recent increase in supply coming from the US is also important?

    • Bob Murphy says:

      Right but other IER authors covered that angle. I linked to them in the beginning.

  2. Peter says:

    Could the fact that the FRN has been gaining strength (relatively) have anything to do with the fact the the exchange rate between oil and FRN has been going downward?
    So in fact we have a perfect storm against oil: slowing demand, increasing supply and strenghtening FRNs?

    • Joseph Fetz says:

      I don’t mean to make a huge point here, on a small one. First, FRNs can only normally be gauged in terms of foreign currencies (i.e. the alternative). It’s very hard to find parity here. After all, each respective currency nation has many policies and continually new statutes the ultimately effect their currency. It’s no different from how things work here in the States.

      Make no mistake, all countries that have had a parity with the dollar have been inflationary. Further, the US’s own numbers have shown positive price inflation after that short period of deflation.

      So, I must ask: when you say that “strengthening FRNs”, what measure are you using?

      • Peter says:

        I should have been more clear, I was basing on two (admittedly amteurish) observatinos, namely the “tapering” by the Fed and the exchange rate of dollars versus yen and euro.
        Not very scientific, I’m afraid. But then again, nothing really is in economics.

  3. Major.Freedom says:

    THANK YOU Murphy for bringing up this point.

    Oil prices tumble and yet where are the “It is the evil speculators!” calls from the presstitutes or congress? After all, oil speculators don’t take year long naps. If oil speculation is responsible for bad rising prices, then surely they must be thanked for bringing them down today. Right? Anyone? Beuller?

    The fact is that the complaints arise solely out of a narrow self-interest. Higher oil prices is worse for those who primarily buy oil related products, and ignorance then leads to anger and blame games.

    • Yancey Ward says:

      The really hilarious thing is that if oil were stocks, the press would be writing stories about the evil shorts.

  4. tesc says:

    Dr. Murphy and the rest,

    I am interested in your knowledge of MM. Would a MM ask for increasing the price inflation target or to reduce it under this supply side expantion?

    • Andrew_FL says:

      Market Monetarists don’t favor inflation targeting per se. A favorable supply shock is supposed to be allowed to reduce overall inflation.

      Theoretically, a target for over all spending is indifferent to the effects of supply shocks on prices.

      If any Market Monetarists think I’m butchering here, correct me?

  5. Rick Hull says:

    I see a couple driving factors for low oil prices:

    * OPEC desire to close out fracking producers
    * Market pressure / OPEC cheaters
    * OPEC desire to kill Russia

    I think OPEC is specifically scared by fracking, is willing to talk about Russia, and denies yet respects market pressure.

Leave a Reply