anaconda

Gold and Oil Price Limits

This round of commodity inflation is being driven by the weak world reserve currency -- the Dollar -- and by increasing demand in a world economy that has seen an economic run of growth, unmatched in history.

The Federal Reserve has a tightrope to walk. Providing liquidity for the markets, but not generating runaway inflation in the process. Signs are that the Fed understands the dilemma, as the Dollar has stabilized against the Euro and is slightly rising.

Oil as a commodity has been effected the same way.

Oil has an inelastic demand curve, but at some unknown breakpoint, those that can't afford oil and it's derivative products now, will not "grow" their wealth enough to begin consuming oil products, and those that can now afford to consume oil products will cut back consumption -- killing increased demand.

Should the Dollar, which is the monetary vehicle oil is currently largely denominated in, stabilize, that will also help stabilize the price of oil.

The current price is a huge spur to exploration and development of oil, and, while the cost is steep, the technology is available to produce petroleum from sources that were uneconomical, below $70 a barrel: Namely, ultra-deepwater, deep-drilling in offshore areas just beyond the continental shelf.

Brazil has had some huge finds (initial estimate, 33 billion barrels) of oil in the last few months, in geologic formations, which are repeated all over the world, including off the U.S. East coast.

This is a virgin, unexplored territory, and already discovered fields of this geologic type (Brazil) suggest no phyisical shortages are on the economic horizon (30 years).

So, again, monetary and budgetary policy, along with trade policy that protects the value of the Dollar and its world reserve currency status, will go along way to restrain commodity inflation -- as oil is the commodity that is crucial to the rest of the commodity chain.

Oil is the stick that stirs the drink.

Oil is expensive now, but if its price stabilizes, the economy will adjust without being strangled.

Oil is Mastery is a blog that focusses on deep water oil exploration.