Wednesday, July 16, 2008


Apologies to Queen Victoria's favorite painter, Edwin Landseer, whose Monarch of the Glen, I've defaced above. Apologies also for the low pun.

The New York Times reports that the inflation rate in June was 1.1%, due largely to rising oil costs which have impacted everything that is transported. That means everything.

AP reports today that the markets are up, due in part to a decline in the price of oil. The article reasons that the decline (a tiny one) is due to "concerns that a slowing economy will damp demand." And I'm certain that is true. But there is another spice in the stew worth noticing: The Bush administration announced yesterday that they will send William J. Burns, the under secretary of state for political affairs, to a meeting in Geneva to discuss Iran's nuclear program with representatives of the European Union and Iran. After seven years of saber-rattling tough talk, the Bushies have decided to take a play from the Obama playbook and sit down with an opponent for a chat.

I mention this in the context of the price of a barrel of oil because of a New Yorker column by James Surowieki I read last year. The column discussed the impact of the "risk premium" on the global price of a barrel of oil. Basically, when traders perceive a potential for disruption in the supply of oil, they bid the price up. Concerns about supply disruption can involve the weather -- a Gulf of Mexico hurricane, say -- or in this case threats of military action against a major supplier. Instability in Iraq is another source for the oil risk premiun. Surowieki's point was that threats to kick Iranian ass over meddling in Iraq served to make Iran's oil more expensive for everybody and so actually enriched Ahmadinejad to the tune of about $2o million a day back in 2007. I'd suggest that the same scenario holds true in the case of the international tensions over Iran's nuclear efforts. No wonder they launched all those photoshopped missiles. Each one had the power to make oil traders more jittery and so more willing to shell out big bucks for their precious black gold. (There are plenty of other sources of upward pressure on oil, of course. Emerging consumerism in China and India doubtless accounts for a great deal of the current price.) There is reason to agree that oil declined this morning because a slumping economy is likely to lead to less consumption, but it's not unreasonable to conclude that the faint hope for a peaceful resolution to the nuclear stalemate with Iran was also a contributing factor.

I wonder what effect McCain's "bomb bomb bomb/ bomb bomb Iran" joke had on the risk premium? Actually, it's a serious question. To the extent oil traders believed he had a chance of winning the White House in November, I'd imagine there was some movement upwards. Bush and Co. certainly have contributed to the unease in the world market for oil, but everybody knows that by now. Talk about a psychological effect. This morning I read through yet another benighted mutual fund report -- this one dated April 30, 2008. A statement from the fund's managers said that they expected oil to reach a high of $65 a barrel by the end of the year. As of right now, it's at a bit over $134, even with today's decline.

Retreat in the value of America's biggest 500 corporations to levels below what they were two years ago plus a one-month 1.1% jump in prices because of the astronomical cost of oil. That's stagflation. And it didn't happen by itself.

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