Are the OPEC production cuts a problem?

It’s Wednesday and so I have a few items to discuss followed by some music. Many readers have E-mailed me asking about last week’s decision by the OPEC+ cartel to cut production of crude oil by 1.66 million barrels per day. Taken together with the previous cuts (2 millions barrels per day) in October, this pushed the price of oil up within a day or so back over $US80 per day. Many commentators immediately announced this would drive inflation back up and force central banks to go harder on interest rates. I disagree with those assessments. When analysing cartel behaviour (and OPEC+ is such an organisation), one has to distinguish between price stability and price gouging exercises. As I explain below, I believe OPEC+ to be engaged in a price stabilising activity in the face of anticipated reductions in global demand for crude oil. The risk is that demand will fall further than the producers expect and they will have to make further cuts. But even if the new price level holds, that won’t really trigger a new bout of accelerating inflation.

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Fiscal policy can always protect employment, incomes and business solvency if there is political will

I was at the optometrist the other day getting my regular eye test and all the person doing the test wanted to talk about was whether we were heading into recession. I think he was toying with buying a new apartment to live in and was trying to assess risk with the rising interest rate regime and all the negative talk. I actually don’t like giving that sort of advice to people I am dealing with in that sort of relationship. But it is a good question – and there is evidence either way. First, it is clear that governments can always protect employment, incomes and business solvency with appropriate fiscal policy interventions. Second, it is less clear on what monetary policy does and that is the issue – eventually interest rate rises will cause certain sectors, such as construction, to encounter difficulties and start laying off workers and recording bankruptcies. But the problem is that monetary policy is such a crude instrument that the damage is done before we really can measure it.

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