Gold News

The Cure for High Oil Prices

High prices, or so the saying goes, are the cure for high prices...

CURING HIGH oil prices hardly feels like a cure if you're an airline company or a car maker right now, writes Dan Denning for The Daily Reckoning Australia.

   Here in the US, United Airlines announced it would cut its domestic service Ted (the equivalent of Jetstar), and cut 1,100 jobs while retiring about 70 planes, including the lumbering, old, creaky 747s that fly the Sydney to LA and Sydney to San Francisco route.

Why the drastic measures? High prices. Jet fuel prices are up 89% in the last year.

The auto industry is finally reacting to high prices as well. General Motors announced it would close four truck and SUV plants in the United States and shed 10,000 jobs. GM's capacity to build gas-guzzling trucks will decline by 35%.

It's been a long time coming for GM, of course. And while GM makes fewer bigger cars, the company plans to make a new smaller, more fuel-efficient car. It also plans to get into the plug in hybrid market with the Chevy Volt.

But whether for jets or cars or oil, demand is finally destroyed by high prices. Of course the demand destruction in the transportation and travel market means a contraction of an economic activity. It also means, as GM's CEO Rick Wagoner suggested, a permanent shift to a world where cheap energy is no longer the assumption.

Maybe we're moving toward a different living arrangement after all. But much too late in the game, Fed chairmen Ben Bernanke is trying to talk up the Dollar, as if kind words were any replacement for a real yield.

Bernanke is trying to talk people out of being worried about the very inflation his monetary policy has caused worldwide. He told listeners at a commencement speech at Harvard that heightened inflation expectations by the public are a "significant concern".

   But don't worry, he continued. This ain't nothing like the '70s. It's all good. Nothing to see here. Move along. Go away. Shut up. Goodbye.

   "We see little indication today of the beginnings of a 1970s-style wage- price spiral," is what Bernanke actually said. "The overall inflation rate has averaged about 3.5 percent over the past four quarters, significantly higher than we would like but much less than the double-digit rates that inflation reached in the mid-1970s."

   Well it all depends on how you measure inflation, doesn't it? The Fed probably under reports actual inflation. But it's also probably true that inflation hasn't yet reached the wild levels of the 70s.

   For that to happen, expectations have to begin driving consumer behavior (trading cash for tangible goods while the cash retains purchasing power) and monetary policy must stay loose or become even looser to respond to tight credit markets, bidding to help over-indebted consumers stay over-indebted.

   Do you really think the Fed will be raising rates this year? Not likely, with credit markets still tied up in knots and house prices in the US still falling. Does that spell higher inflation ahead?

   And what does an ever-weakening Dollar mean for the price of crude oil – whether the "cure" of lower demand kicks in or not?

Best-selling author of The Bull Hunter (Wiley & Sons) and formerly analyzing equities and publishing investment ideas from Baltimore, Paris, London and then Melbourne, Dan Denning is now co-author of The Bill Bonner Letter from Bonner & Partners.

See our full archive of Dan Denning articles

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