Oil hit $126 a barrel today on production fears. Refiners and firms that need oil to make money seem to be hoarding it as the price rises inexorably higher. According to Bloomberg, “U.S. crude supplies rose 5.65 million barrels to 325.6 million barrels last week, amid increased imports.” In the end, this may spell disaster for an economy attempting to recover from the credit crisis begun in the subprime sector.
The UK Times newspaper stated:
New York’s main oil futures contract, light sweet crude for June delivery, touched a high of $126.20 while London’s Brent crude contract hit an all-time record of $125.90. Oil prices have risen 25 per cent since the beginning of the year and more than doubled compared to this time last year when it was trading at $62 per barrel.
Right now, the U.S. Federal Reserve is attempting to keep interest rates low and central banks around the world are adding liquidity to the money markets in order to end a global credit crunch. But commodity price increases are going to limit their ability to act. Oil is not the only commodity rising in price. Almost all commodity prices are hitting record highs. For example, on the heels of the terrible cyclone in Myanmar and the loss of life there, it is apparent that the rice crop is a total loss, making rescue and aid efforts all the more urgent. According to Bloomberg, this also has contributed to a 12% rice in the price of rice in the last week alone.
Ultimately, the easy money produced by the Fed’s interest rates policy is only stoking the gains in commodity prices and may feed through to inflation until the Fed is forced to begin raising rates. In the meantime, prepare to spend more money for food and gasoline.