Jul 22 2008
Will the Bank grasp the opportunity of falling petrol prices to cut interest rates?
Whilst the politicians in the USA are thinking of legislating to stop speculators in commodities, and MPs in the UK are busily enquiring into whether there has been speculation in commodity markets or not, the real world has moved on apace. The share prices of commodity producers are indicating falls in energy and some commodity prices, oil has tumbled more than 10% in a few days, and some metal prices are in retreat. As so often, the politicians are busy talking about shutting stable doors long after the race horses have bolted.
No-one can be sure this is the decisive turn we have been waiting for in commodity and energy prices, but it has been likely for a few weeks that some of the froth will now go out of these markets. The news background for final demand for energy and raw materials is grim, with Asia tightening to squeeze high inflation out of the system, and with the West still in the iron grip of a Credit Crunch with a weakened banking system. If commodity prices are ever going to come down, now would be as good a time as any. It is most unusual for the price of anything to surge ever upwards in a straight line.
I have written before on how there is speculation and investment in commodities as well as higher overall demand from Asia, and explained how this could depart as quickly as it arrived. I find it odd that anyone could think otherwise, or think it worth spending time debating it. Once speculators and nervous investors see prices falling, some will decide not to hang around and will add to the selling pressure.
It is good news today to learn that there is strong price competition on the forecourts lowering the prices of petrol and diesel at last, after several months of ever rising prices. It reinforces my message to the Bank of England - fight recession, inflation will subside as and when these prices come down. The markets which have made it so difficult for muddled Central Bankers in recent months are at least temporarily coming to their aid. Let’s hope, like drowning men and women, the Monetary Policy Committee members grab this lifeline now it’s being thrown to them. They should cut interest rates without delay.
(Please note this expression of opinion is not investment advice)
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
What do you make of Mish’s article where he says, “Deflationary Hurricanes In US And UK
I agree Blanchflower having previously stated Deflationary Hurricanes to Hit U.S. and U.K. In fact, I believe the US is in deflation now.
However, Blanchflower is mistaken if he thinks lower rates are going to be some kind of magic bullet. One look at the US should be proof enough.”
Surely trashing the pound by lowering interest rates will simply import inflation?
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I suspect George W is responsible for this by (A) deciding that the US should open up some of its new fields which the “environmentalists” have been keeping in the ground for decades & (B) sounding a little less like he will attack Iran thus closing off all oil from the Gulf.
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Cutting into the QUANGO state to fund slashing the PSBR while using the cash windfall from VAT & North Sea Oil tax from the price of a barrel being higher than a year ago to fund a 15p a litre fuel duty reduction would both limit the money supply while reducing transport costs . That would allow the fall in inflation needed to bring down interest rates and thus avert economic meltdown. Boosting the savings ratio by making ISA’s more generous would help in this regard too . Reducing civil service numbers & government procurement costs while wasting less on consultants might we wise as smaller government equals prosperity - just look at Eire !
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Why doesn’t the government have the sense to make some savage cuts in expenditure so that it would have some billions to play with?
Reducing the price of lorries’ diesel would be a very good start.
Slashing the spiralling costs of local government might be another.
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Surely anyone who participates in any market is a speculator. It’s not just win win or we’d all be doing it. People loose money as well.
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John - I asked you before about how you thought speculation increased prices in the oil market when it is mainly done through futures, which of course have both a long and short position and very rarely involve any change in the physical market.
You suggested, I think, that the mechanism you thought was happening was the individuals were driving around with more petrol than they otherwise would, and hence there was a physical response.
If that is the correct characterisation of your views (and if not please correct me) I’m not sure the numbers stack up. If we assume there are 35m cars and small vans in Britain, and each has a 10 gallon fuel tank, that’s 350m gallons of capacity, which is about 10m barrels of oil. So if people were storing 20% more, that would only be about 1 days consumption, which if true globally surely is not enough to make oil so much more expensive.
Reply: No, that is a caricature of what I said. I pointed out that many people were preempting price rises by hoarding, buying forward etc - and many were putting commodity investment into their pension funds.
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Sorry I’m not trying to caricature your argument. But I’m not sure the pension fund argument works either. The pension funds are buying futures, mainly on Nymex. Someone else is going short these futures and no physical oil is changing hands. I find it hard to see how that influences prices, although it certainly seems like it does.
Reply: It all creates extra demand for the commmodity - too many buyers chasing too few sellers causes rising prices
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Thanks for replying again. But doesn’t purchase of a long futures contract also require sale of that futures contract - so how does it create extra demand for the commodity?
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