Opinion - Editorials   

Global pressures on prices

On Monday morning, crude prices touched $111 a barrel in Asian markets. It was only last week that they reached an all-time high of $110. The regularity with which global oil prices keep shattering previous records is undoubtedly a worrisome development for governments, central banks, oil producers, and consumers throughout the world. The surge is inextricably tied to major economic problems of the United States, manifested by, more than anything else, the weakening dollar. The ailing greenback has fuelled the spurt in oil prices. Global oil trade continues to be invoiced in dollars. For those holding stronger currencies, oil has become more affordable. The euro was recently quoted at its life-time high of $1.5808. All major currencies, including the Japanese yen, have also been strengthening in relation to the dollar. The American currency’s weakness has prompted investors to flock to commodities, especially gold and oil. It is no coincidence that, along with oil, gold is also quoting at record highs. The inverse link between the dollar on the one hand and oil and gold prices on the other is strengthening by the day. Crude futures offer a hedge against a weak dollar. The phenomenal rise in the prices of many other commodities, including those of wheat and other food articles, in turn has stoked inflation worldwide. While speculative money has always gone after commodities, including oil, what is worrying this time is the existence of a self-generating cycle in which fears of inflation force investors to hedge in commodities, causing prices to rise further.

Many other factors both on the demand and the supply sides are obviously contributing to the phenomenal rise in petroleum prices. But the proximate cause is the economic crisis led by the deteriorating financial markets in the U.S. Over the last weekend, a major American financial institution, Bear Stearns, was saved from the brink of bankruptcy. Its near-collapse seems to suggest that there is no immediate end to the deepening crisis. In a surprise move, the U.S. Federal Reserve cut its discount rate by 0.25 percentage point and promised to effect wider interest cuts at its forthcoming meeting on Tuesday. However, recent liquidity enhancing measures have signalled a weaker dollar and stoked inflation further. The U.S. economic crisis has also brought down very sharply the stock market valuations in every country. For many countries, including India, the high oil prices will push up the petroleum import bill further. High commodity prices have already raised inflationary expectations and are sure to inhibit the Reserve Bank of India in its monetary policy.

Printer friendly page  
Send this article to Friends by E-Mail

Stories in this Section

Global pressures on prices
Tax havens under the scanner
The meaning of news and getting it right
A key strike and some portents
‘It seems… they want to kill anyone not Tibetan’
‘Iraq humanitarian situation critical’
Corrections and clarifications
Regrettable
Disturbing
Farm loan waiver
Woman & romance

Copyright © 2008, The Hindu. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu