Economics: Why Does The Price Of Oil Ignore Opec Production Cuts & The Middle East Conflict?

 (Drivebycuriosity) - The price of oil has been falling in the recent weeks. Today oil costs about as much as a year ago (charts above cnbc). 

Stagnating oil prices seem to be surprising. Saudi Arabia, Russia and other members & associates of Opec cut oil production several times in order to hike the oil price. In vain!

 

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And pundits predicted that the ongoing war in Gaza will drive the oil price much higher which could reignite inflation ( bloomberg). Some reminded to Israel´s Yom Kippur War with Egypt in the year 1973. The conflict induced Saudi Arabia and their Opec colleagues to punish the West with an oil embargo which caused a jump in oil prices and years of recession. Not today!

I suppose that the price of oil is constrained by the tight money supply.

 

 

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It is no coincidence that monetary growth and price of oil have been moving in step in the recent 5 years (charts above). Both went up in the years 2020/21 and dropped in 2022.

As I have posted frequently in the years 2020 & 2021 the US government flooded the economy with stimulus checks in the value of trillions of dollars (American Rescue Plan), supported by massive bond purchases by the Federal Reserve (driveby ).  

The government money landed directly on the bank accounts of the Americans, blowing up the money volume M2 (bank notes & coins & deposits at banks). Milton Friedman described this as helicopter money (cato ). As a result in 2020 & 2021 the US money supply M2, the engine of the inflation, jumped 40%

The money deluge hiked suddenly the purchasing power of US companies & consumers and raised the prices of almost everything. No wonder that oil prices went up. The causal relation between money supply is known since the 16th century (quantity theory of money) and described by Copernicus and later by Milton Friedman and other monetarists (driveby ).

 

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Fortunately the inflationary money flood ended in 2022. Since November 2022 the US money supply M2 has been shrinking, curbing the purchasing power of companies & consumer. This causes a slowdown of the inflation rate and is also holding the price of oil in check. 

If the US government doesn`t cause another money flood the risk of an oil inflation is extremely low.