Every day you will hear tens of comments that the war risk in Middle East and possible Israel+USA strike on Iran is moving up the oil prices that at the moment are reaching record highs in euro and are close to new records in dollars. Generally this logic is true. Political risks do influence markets and war risks influence markets strongly. But besides from the risks something other is needed and is more important for the prices. That is the money supply and the general inflation situation. Without enough money on the market, even an alien invasion will not be able to skyrocket the oil prices.
Unfortunately, at the moment we have much more than enough money to skyrocket
the prices. Deeply indebted after decades of deficits in budgets, the
governments of leading countries decided to resolve the problem by printing
money. Permanent extremely low interest rates, plus enormous quantative easing programs
are pouring new cash in economy, feeding this way the inflation.
When inflation is coming the first to become more expensive are energy
resources, food and gold. Energy and food rise in prices because they have low
flexibility in use. They are much harder to be reduced in buying as a reaction
to high prices, and when much money go to market, the prices simply go up. Gold
is the eternal inflation protection asset, so initially smart money, but after
that - all money, trying to protect its value, are pressing the prices up.
So at current moment we see all these prices going up. Therefore it is not just
Iran project-war the reason for high oil prices. The war can influence only on
oil, but not on gold and food. In fact, in war time it is possible the gold
even to become cheaper, because risky times are strengthening the US dollar and
this way decreasing the asset prices. In addition, even without Iran on oil
market, this has no the potential to call record oil prices. It has the
potential for a moderate increase, but nothing more.
In fact Iran project-war is just an excuse, and not the main reason for high
oil prices. Leading central banks are pumping liquidity in markets to keep alive
the high deficit government budgets. The new hot money are initiating inflation
and non-flexible assets are first and mostly to increase.
From time to time I even think that Iran war is needed to excuse fuel
inflation. With so much money-print the inflation is inevitable. But inflation
is dangerous for society and can provoke social instability and unrest. When we
see 5 or even 10 dollars per gallon in USA, the people will start asking
questions. Bitter questions. And the politics will have to say: "Sorry, we
printed money to fund our deficit, to pay for social system, pensions and
health, and to save bankers. This caused the inflation and this is the reason
you have to pay $10 per gallon..." Do you expect this to happen? Not of
course. Instead it is easier to say that the war in Iran is guilty for high
prices. But is Iran war guilty for food and gold prices?
When an inflation is coming something other is coming too - the politics
imagination of fabricating excuses. And Iran war is just an excuse for the
general political responsibility that refuses to make reforms and is
"deciding" problems by printing money. There are much other excuses,
some of them very funny.
For instance in some Eastern European countries at the moment there is an enormous
increase in eggs price. As a part of general food inflation there is nothing
surprising. In fact, not only the eggs price is rising. But being more extreme
and speedy, and due to sensitive moment (Easter is coming soon), the eggs price
becomes general and dominating problem. So the governments have to find an
excuse. And they found it. Guilty for high eggs price are... EU regulations for
so called "happy hens". In recent years EU passed a regulation for guaranteeing
minimum living conditions for hens. This is a stupid regulation - one of many
stupid laws of EU. But it can't provoke such sizable price increase. But it is
a good excuse. And politics are successfully using it. EU happy hens are
guilty... :)))
So if we really need normal and non-inflation oil and gas prices, we must look
at FED, White House and ECB, and ask them for answers. Iran is neither a
question, nor an answer... It's just an excuse...
Dobri