James Hamilton (”Supply, demand, and the price of oil”, Econbrowser, May 31) wonders if the recently rising oil prices signal a resurgence of economic growth. In the U.S., Europe, and Japan, however, the consumption of oil has been reduced even while the price of oil was booming, from 2005 to 2007. Moreover the U.S. consumption in the first three months of 2009 has been well below that of 2007:Q1. Japan’s real GDP fell at a 15 % annual rate in the first quarter of this year, and declines in Europe also exceed those in the United States.
Meanwhile, there is no indication of rising inflation anticipations as measured by the implied expected inflation rates in U.S. nominal yields compared to inflation indexed yields. And it is not a question of anticipated dollar depreciation since oil’s price is rising in every currency.
Add to that oil inventories that are well above average and you are confronted, as Hamilton is, to a major puzzle.
His tentative conclusion: the long term prospect for rising oil prices is much better than the short term one, given the growth trend in China especially, and speculators have in mind the long term. As he notes “oil stores for quite a while, particularly if you just leave it in the ground. …Perhaps those crazy speculators are doing just that.”
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