Oil prices aren’t going anywhere

So while oil prices surge (any doesn’t our media love new words? I look forward to collective MSM embarrassment in a few years, pretending, so 90210, that they themselves, never used it. Or never really liked it, or whatever they think makes them sound cool), it’s worth keeping an eye out for why that trend isn’t going away.

Yes, Peak Oil is a big factor.

Here’s another: oil is an import, from the perspective of the US, and it is bought with the ever-of-less-value US dollar. As long as the dollar loses value, dollar-priced oil will gain it. Hence these manner of stories:

Australia’s central bank increased its benchmark interest rate for the second time in four weeks and said there are signs the highest borrowing costs in 12 years are prompting consumers and companies to temper spending.

Governor Glenn Stevens and his board raised the overnight cash rate target by a quarter point to 7.25 percent in Sydney today to stem the fastest inflation since 1991. Stevens said rates have risen “substantially” since mid-2007.

The nation’s currency dropped and bonds rose as investors bet the central bank may not raise rates again in the next 12 months. The 1 percentage point increase in the benchmark since August contrasts with the U.S., Canada and the U.K., which have cut rates to cushion their economies from slower global growth and credit-market turmoil.

Yes, a full percentage point. We had our sixth rate increase in 3 years during the election campaign, and this is the second again since thing – the commodities boom is simply very strong. Nor are we alone in our willingness to face inflation. More relevantly, though, capital is moving away from low-interest-rate US to other currencies (Euro, Yen – I certainly don’t imagine it’s all heading to Australia), and operating currencies (NGOs, multinationals, small governments) are probably quietly diversifying, removing an old source of over-value for the US dollar.

All of this means that the prices of things that are typically priced in US dollars are going to appreciate. E.g. Gold (’cause it’s easier to find):

gold prices

Flattening it out:

ln gold prices

We still see the US Dollar prices moving from the Euro price up towards the AUD price. Why? Well, see the price of the US dollar:

exchange rates

What do you think that will do to the percentage changes in price, USD, EUR and AUD? Exactly. Again, gold (or oil) is appreciating in price, but moreso when that price is denominated in a sinking currency.

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