Oil surged again yesterday, this time hitting a new all-time high.

When we took our daily reading from the New York Mercantile Exchange, oil was valued at $83.14 a barrel, a full dollar higher than the second-highest reading, recorded 9 days ago.

oil

The latest surge in oil came about as the senators in the United States seemed to be pressing for war against Iran. Yesterday the Senate voted 76-22 in favour of declaring Iran’s Revolutionary Guard a terrorist organization. Hillary Clinton was among senators who voted for the amendment.

With oil so high in price, you would think inflation will start to rise again soon, and that it is a form of lunacy to lower the rate of interest at this time, although this insanity falls well short of the madness of senators’ war mongering.

Then again, a high price of oil is not necessarily inflationary. Inflation is sustained rises in prices, and a jump in oil caused by one-off factors could actually have a similar impact on the economy as a rise in the rate of interest. After all, if oil is more expensive, then demand for other products should fall.

But this argument is only true up to a point. If oil is high in price because world-wide demand is high, then we are seeing a case of demand causing prices to rise, and the correct response should be higher interest rates.

It is true that the recent surge in oil has been caused by fears about security in the Middle East. But the underlying cause of high oil is surging demand, especially from China. And you can’t have it both ways. You can’t celebrate low prices caused by cheap imports from China, and then write off high commodity prices caused by rising demand from China as an external factor.

To an extent, the world outside of the US has been cushioned against the rising price of oil by the falling dollar. This morning’s price of $83.14 a barrel of oil actually works out at £41.11. Back in July last year, when oil reached a then all-time high of $78.10, it was worth £42.44. So yes the sterling price is high – but not quite a record. If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link

Copyright #169; 1996-2007 Find.co.uk Limited. All rights reserved

© Investment & Business News 2013