Hamilton on speculation, inflation and oil

On Monday we wrote that the rise in oil prices, so far, was not in the range thought to risk threatening an economic recovery. James Hamilton, who wrote the most complete and influential study on evidence that high oil prices helped put the US into recession in late 2007, also noticed the price rise. And he doesn’t seem concerned with $65+ oil either.

Hamilton is more concerned with the reverse question, which is just as interesting (and a little more immediate): whether the rising oil prices signal an economic recovery:

He points out that much of the ‘recovery’ that is being talked about now is in the developing world; while oil consumption and GDP in developed countries is still in the doldrums.

He also sees a big role of inventories. Dave Cohen over at the US Peak Oil Association, who in a perhaps contrarian way points out that the vast amounts of stored oil – including floating at sea in tankers – will at some point be dumped back on the market by physical traders. Hamilton writes:

The graph below plots the behavior of U.S. crude oil inventories over a typical year, along with what actually happened in 2008 and so far in 2009. The fact that inventories were significantly below average in the first half of 2008 is one of the indicators to me that you can’t attribute the whole run-up at the time to speculation.

Hamilton points out that being long in commodities might be one way to hedge against inflation if you believe, as he (among others) does, that inflation is set to rise.

Related stories:

Supply, demand and the price of oil (Econbrowser)
Are oil prices threatening the world economy already? (FT Energy Source, 01/06/09)

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