J P

Inflation to Follow Oil's Direction

The price of oil doesn't change the money supply in any significant way. Thus, the price of oil has little effect on the rate of inflation. The rate of inflation is controlled solely by the federal reserve (at least inflation in US dollars) and they do so, not by changing interest rates, but by deciding or not deciding to create dollars to underwrite US federal debt.

I'm not quite sure why oil is down now, it should be well above $80 due to the Iran trainwreck that seems inevitable. But I'm certain oil will never see $35 a barrel prices in the US, at least not in a situation you would like.

The reasons are twofold:
1. The dollars used to measure a barrel of oil have been inflated massively for the past 30 years, thus only an increasing supply of very cheap oil acquired at ever greater political cost has been able to keep the price of oil down when measured in rapidly devaluing dollars.
2. The supply of easy to get cheap oil has peaked and is now in decline.

The only possible way we could have $35 oil again would be for the federal reserve to raise interest rates to around %20, stop underwriting federal debt, and start sopping up all those dollars in circulation with gold. But I am certain they don't have enough gold to do it.

If we'd kept to the gold standard, we'd already have $35 a barrel oil, even with its increasing rarity.