Disputation of monetary policy risk.
First, allow me to say that I appreciate writers who take a lot of time and effort to make these sorts of analyses. But I would like to discuss the relationship of quantitative easing and oil prices.
First, quantitative easing was not simply just to nominally lower interest rates, but to also ease the credit crunch, specifically by first buying up mortgage-backed securities from government-sponsored enterprises. Short-term rates dropped, but so did oil prices.
Second, during QE1, there were three other announcements (Dec 16, 2008, January 28, 2009 and March 18, 2009) of support for QE1, via announced purchases of US Treasuries, as an effort to lower rates. So what happened? Oil prices rose from the floor of $33.73 on December 26, 2008, but more importantly, nominal 3-month rates also increased from the floor of .01% reached on December 22, 2008, to a high (during this period) of .32% on February 24, 2009.
Third, QE1 stopped by the end of Q1-2009. But between QE1 and the expectation of QE2 taken from Ben Bernanke's speech at Jackson Hole in late August 2010, 3-month rates dropped on its own.
So in the first case, oil prices diverged from the expected correlation to short-term rates where oil prices dropped even as rates dropped. In the second case oil prices diverged again from the expected correlation to short-term rates where oil prices increased even as short-term rates increased. In the third case, short-term rates correlated to oil price increases, but rates were not influenced by QE, because the QE program had already ended.
I believe markets react to the expectation of the correlation between oil prices and short-term rates. That is to say, oil prices ARE affected by short-term expectations of the movement of rates, but not of the actual movement direction of rates.
But I don't believe prices will continue to go up: Eurozone austerity will come to a head, shortly, and not for the better. Oh, and I should add: I completely agree with the conclusion that the only way out of the madness is to stop the addiction altogether.
