Oil And Interest Rates: Fixing One Breaks The Other

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Low interest rates and low energy costs. That’s the ticket. Get both in place and the economy will roar ahead.

Unfortunately, the Fed’s cut in interest rates may be the most important factor in driving oil prices toward $90 in the fairly near future. Crude traded near $82 in New York yesterday.

The perception that the global economy may be helped by lower interest rates in the US may not be entirely true. Granted, companies can borrow money to expand at a lower cost. Private equity firms may find buy-outs more financially practical. Home default rates and consumer lending costs may improve. The US consumer may get a second wind which could help drive spending and domestic demand for imports.

But, lower interest rates and all of the good things they bring will also fuel demand for oil. As the Northern Hemisphere moves toward winter and demand in large countries like the US and China is spurred by better economic conditions, oil supply is unlikely to keep up. OPEC has only offered a 2% increase in production starting in November.

High oil may hurt the car and airline industries first. But, then it moves to petrochemicals, transportation, and the cost for people to get to retail outlets. The damage can come pretty fast.

Bernanke and his associates may have helped the stock market for a few days. But, they may have hurt the economy more than they know. Weathering tough times in mortgages, sour buy-out loans and hedge fund woes are one set of things. And, those are probably manageable.

Hurting the consumer’s daily costs has much greater consequences.

Douglas A. McIntyre