Phil Anthropy

Inflation Fears Are Inflated

If we listen to what the prez. of Iran said recently, it's the West keeping oil prices high, for their own purposes. This sounds like a bunch of hooey, particularly since I have heard allegations that the Iranians and Venezuelans were slowing down the tankers to keep prices high, but perhaps those were rumors. Let's take a fresh look.

Who stands to benefit from high oil prices? If we have a huge negative balance of payments and a huge budget deficit, wouldn't that tend to weaken the dollar? Yet, the dollar is strengthening. As long as oil is pegged to the dollar, rising oil prices increase the demand for dollars to pay for it, shielding our currency from the weakness it actually deserves in terms of inflation of the money supply.

One might ask what happens to the dollars spent for oil. I conjecture that these are recycled by the oil producing nations, and in particular by Saudi Arabia, back into our treasuries and equities markets. This keeps interest rates low and prevents the stock market from crashing.

But what about the inflationary effect of our excess dollars, in general? Don't we need to raise interest rates to slow down the economy and prevent inflation? Not if the price of oil absorbs the excess dollars that were printed, keeping the economy moving slowly, which keep interest rates down and allows the financial institutions a chance to recover from the credit crunch.

Did I mention that higher oil prices, in the midst of these other advantages to our government, lead to higher tax revenues? The oil companies pay tax on their profits from domestically pumped oil, and the more profit, the more income tax.

So perhaps Iran's radical (but nobody ever said he was dumb) president has a point. It is in the specific interests of the U.S. government to keep oil prices high at this particular time. To let them fall might overheat our economy, leading to higher interest rates, which would tank the banks. Since the banks wouldn't like that, I suspect that measures will be taken so that it doesn't happen. Higher oil prices may be one of those measures, not a "free market" phenomenon.

Since I have no background in economics and no insider knowledge about my speculations, I thought I'd run this one up the flag pole and see the reaction.

If the economists in the audience can debunk this theory easily, so much the better, because I would rather it weren't the case. If it is indeed the case, then we have some political issues of much greater concern than high oil prices.