I’m confused about the negative correlation between oil prices and interest rates. Which has a more direct bearing on the other? If oil prices go up, costs go up, inflation goes up, so interest rates (price of borrowing money) must go up to stem inflation. The below statements 1. and 2. are not clear to me. I look forward to your feedback.
davidmich
The Prize–The Epic Conquest for Oil Money & Power by Daniel Yergin
p. 720
referring to George Keller (Chairman of Chevron)
" He knew that crude prices would go down and that interest rates would go up. But he didn’t think it likely that both would occur at the same time.
p. 741
The gains from falling oil prices (higher growth and lower inflation)would outweigh the losses (the problem of the energy industries and the Southwest)
You’re misquoting the text by leaving out the context.
Keller was making a large cash offer to buy Gulf. That offer would not work if the future he had projected did not come true. There are always risks to an economic prediction. The proper quote is:
You see the difference? The price paid for Gulf could not be earned back if *either *of two possibilities followed. He was not expecting the two to happen simultaneously, although that would be even worse. They were not thought to be connected; they were simply a list of bad futures.
The context of the page makes the second quote clearer as well. In any economic transaction, higher costs will benefit some people and hurt other people. The $29 price per barrel befitted OPEC but caused so much pain and disruption elsewhere that it was not sustainable. There was a chance OPEC might break up. A lower price needed to be found that gave the best net total of benefits to everyone on all sides. The quote you give is part of a longer discussion of the pluses and minuses of various price points for the longer term.
Thanks Exapno Mapcase. That is clearer but my larger question still involved the influence of oil on interest rates. How does that correlation usually manifest itself? Oil prices go down, stronger dollar, higher interest? I’d appreciate some clarification on that. Thanks.
davidmich
Today there is little correlation. The global consumption of oil is now about 3% of global GDP. Small shifts in the price of oil don’t make much of a difference. Other economic factors determine interest rates. And because of the recession starting in 2008, central banks in almost every western country have been deliberately holding interest rates as low as possible. Oil hasn’t been a factor at all.
It seems oil still does make quite an impact on the world markets.
“Traders were transfixed by unsettling developments in Iraq where an all-out sectarian civil war seems to be unfolding. Islamist militias took control of Iraq’s second-largest city, Mosul, which also happens to be the gateway to the nation’s northern oil fields. And they seem intent on marching on Baghdad itself.
It’s just the latest example of the recurrent chaos—the Arab Spring, Nigeria, Russia-Ukraine, Iran—that is beginning to look like the outright failure of the modern petro-state. The repercussions are global, of course. Especially in the US, where consumers will soon feel the pinch of rising gasoline futures, which jumped 4.1% this week. And prices for hamburgers won’t be going lower any time soon either, if futures prices for cattle continue on their current trajectory. All in all, the disruptions shouldn’t be enough to dislodge other improvements in the US economy. (But the specter of a return to unpleasantness in Iraq likely won’t help the US consumer mood much.)”
You may have the tail wagging the dog, rather than the other way around - this changes if you think about the impact of interest rates on commodity prices. Changes in the real interest rate definitely affect decisions about the production and sale of oil.