Reply #16: Too much money to blame for rising price of oil, economists claim

[54anickel]

Now we're getting somewhere!

http://www.nytimes.com/financialtimes/business/FT200408...

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But while few would dispute the role of supply disruptions in pumping up the price of crude this year, a small but influential group of economists thinks that a price fluctuation of this magnitude is determined less by supply and demand for oil, and more by that for money.

They think interest rates have much greater influence on commodity prices than is widely assumed, and blame loose monetary policy in particular for the current high level of oil prices. If true, their contention underscores the unpredictable consequences of monetary policy and provides a powerful argument in favour of tightening monetary control.

Mervyn King, the Bank of England's governor, has defended central banks from the charge that their lax policies have fuelled the oil price rise. But he conceded that aggressive rate cutting may have contributed to the rise in commodity prices, including oil.

"I think there has been an expansion of money and liquidity around that does lead in general to an increase in asset prices, of which commodities prices are one," Mr King said last week. "But that has, of course, been a deliberate response by the monetary authorities to the situations in the economies which they each face."

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