Commentary > Bid and Ask
Crude inflation
Indications from OPEC that it may allow the price of oil to rise have important implications.
December 4, 2003: 8:51 AM EST
By Justin Lahart, CNN/Money Senior Writer

NEW YORK (CNN/Money) - The good news out of Vienna Thursday was that OPEC ministers were unlikely, with winter descending upon the Northern Hemisphere, to cut their oil production quotas.

The bad news was that, as the ministers ambled in and out of Vienna's pastry shops, they found the dollars they made selling oil wouldn't buy nearly as much Linzertorte as they did a year ago.

More than 20 percent less, in fact. The euro has been on a tear against the dollar, as have most of the world's currencies -- the Fed's trade-weighted dollar index has declined nearly 16 percent.

And so, unsurprisingly, the ministers have indicated that OPEC's preferred price band of $22 to $28 a barrel for oil is more or less defunct. Right now the basket of oil prices that OPEC keeps tabs on is just above the upper end of that range.

There will be plenty of pushback from the world's energy consumers for OPEC to keep the range. Here in the United States we're already putting a lot of our hard-earned in the Hummer's tank. In Europe and Japan the drop in energy prices, in euro and yen terms, has been a boon, adding a stimulative force to hard-hit economies.

But although OPEC might give in temporarily -- particularly if it believes the world economy is still too weak to stomach energy costs going much higher -- it's hard to imagine it won't eventually let energy prices rise. For OPEC inflation isn't a far-off concern. To the contrary, the money it makes buys substantially less on the world stage than it did a year ago.

In other words, for OPEC inflation is happening right now. And when businesses find themselves in an inflationary environment, what do they do? Hike prices.

Nor should we view this in a vacuum. Any overseas business (unless it is in a place like China, with a dollar-pegged currency) that sells to the United States is getting and less and less bang for the bucks it earns. To preserve profits, it's eventually going to have to raise prices.

Oil and Gas
Economic Indicators
Organization of Petroleum Exporting Countries (OPEC)

Meantime, U.S. companies that buy goods from overseas, or raw materials that are globally traded (like oil) are going to see price increases. To preserve profits they too will need to raise prices.

Given all the recent carping about deflation, this whiff of inflation doesn't seem like such a bad thing. But there may be some cause for concern. In most cases, rising inflation in the United States comes from an economy that is running too hot. In this case, it is coming instead from a decline in the dollar. How is this going to pan out?  Top of page

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