Monetary policy Oil and other commodity U. S.

Low oil prices is an extension of QE

U.S. WTI crude futures extended declines to near $73 a barrel, a four-year low. The OPEC increased signals before meeting tomorrow that it would hold off making any major production cuts. Despite low oil prices, none of the OPEC members would like to cut production to lose their market shares.

Oil prices were seen continuing to decline as the trend of energy independence in the U. S. prevails. Oil production in the U. S. has increased dramatically since the financial crisis.

I think lowering the cost on energy for consumers is becoming an extension of monetary stimulus, especially when the U. S. Fed has ended its qualitative easing program last month and is now expecting to raise interest rate. One of the reasons of slowing recovery post 2007/2008 crisis was weakness in consumer spending. A month ago, I attended an event by the Bank of Montreal. A bank strategist pointed out that the consumer debt today is actually higher than before the financial crisis. He suggested that high debt is responsible for weak consumer demand.

In that sense, low price price shall serve an extension of monetary stimulus, by reducing the cost on energy. The saving, I guess, in the range of a few dollars a day for everyone, could power consumptions in other areas.

From policy maker’s perspective, low oil price is more than welcome. U. S. is now in better position using its production leverage, so low oil price is likely to stay for a while.

Leave a Reply

Your email address will not be published. Required fields are marked *