Oil Price Goes Above $70

The price of a barrel of Brent Crude, today, went above $70.  It is another indication of rising global inflation, fuelled by oceans of liquidity that central banks have pumped into circulation over previous decades, and notably over the last year.  The previous liquidity injections were deliberate measures to inflate asset prices, and combined with fiscal austerity, to hold back economic growth, and so hold back increases in wages and interest rates, to the same end.  But, over the last year, the liquidity has been used to feed directly into consumers pockets as replacement incomes, as governments deliberately cratered economies with measures of lockout and lockdown.  The liquidity injections went along with huge fiscal stimulus into the economy, which itself brought an astronomical increase in debt, that will lead to sharply rising interest rates, and collapsing asset prices.

The rising price of oil is occurring, because all of that liquidity, and fiscal stimulus is now joining with the opening up of economies, as the lockouts and lockdowns are lifted.  Demand would have increased on that basis anyway, but now it is put on steroids by all of the liquidity, and fiscal stimulus that has been given to consumers, which has built up as a wall of cash waiting to be spent.  Households reduced their debt levels, in conditions where they were given these cash injections but has reduced opportunities to spend, but the consequence of that, is likely to be that as they now find themselves able to spend again, they will quickly run up those debt levels to at least their previous levels.  As they see inflation rising by the week, they are even more likely to want to buy now and pay later, so as to avoid having to buy at higher prices down the road.

Oil prices were particularly constrained because government imposed lockouts and lockdowns meant that not only car travel, but air travel was severely restricted, thereby reducing global demand for oil significantly.  But, OPEC plus Russia, were able to join together to restrict supply so as to prevent the oil price falling too far.  Now, demand is rising sharply, pushing the price up with it, even though OPEC+ are now likely to increase supply, and Iran is likely to bring additional supplies to market.  But, these measures, are only likely to prevent the price rising too fast, as global demand increases again.  As I wrote several years ago, the price is not likely to ever go above $100 (2015 Dollars), because although global demand is likely to continue to rise, the increase in demand will be limited as the world moves from fossil fuels to alternative energy, for example, the rapid replacement of petrol engine with electric, and because new supplies of oil, such as from shale, put a cap on the price.

Oil Prices 1960-2021

But, $100 still represents nearly 50% more on the price from here.  A move upwards from $70 to $80 looks quite possible in the coming months.  Oil still plays into large areas of the economy, not just in terms of transport costs that affect the prices of all commodities, but also in the production of petrochemicals, plastics, fertilisers and so on.  The increases in consumer price inflation over recent weeks, besides being understated, were also subdued because of lower energy prices in the period, but now that is reversing too, giving a further boost to costs that firms will pass on, given that all of the excess liquidity has provided a boost to monetary demand, giving them headroom to raise prices.  As central banks continue to pump liquidity into economies, and will do so so that firms can continue to raise prices, so as to protect their profit margins, the basis of the kind of price-wage spiral of the 1970's is again being created, but this time in the even more febrile conditions of a strongly growing global economy, bursting out of the hibernation of the long wave cycle that the measures taken after 2010 had placed it in.

That means that the inflation is likely to rise faster, and become entrenched far more readily than it did in the 1970's.  Oil is just one indication of that.