It’s kind of complicated. when the Fed inflates the monetary supply- the money goes somewhere . Where exactly is not important, what matters is that some people have access to this new money while others do not. The first group can bid up prices to get what they want, and the second group can not. This is why monetary inflation causes prices to rise.

However, the rise in prices is not uniform.

The most fateful results of inflation derive from the fact that the rise of prices and wages which it causes occurs at different times and in a different measure for various kinds of commodities and labor. Some classes of prices and wages rise more quickly and rise higher than others. Not merely inflation itself, but its unevenness, works havoc.
While inflation is under way, some people enjoy the benefit of higher prices for the goods or services they sell, while the prices for goods and services they buy have not yet risen or have not risen to the same extent. These people profit from their fortunate position. Inflation seems to them “good business,” a “boom.” But their gains are always derived from the losses of other sections of the population. The losers are those in the unhappy situation of selling services or commodities whose prices have not yet risen to the same degree as have prices of the things they buy for daily consumption.
These victims, by and large, are the same kind of people?roughly, the middle classes?who are injured as creditors through the depreciation of their bank savings, insurance policies, pensions, etc. The salaries of teachers and ministers, the fees of doctors, go up only slowly as compared to the tempo with which prices of food, rent, clothing, and so on, go up. There is always a considerable time lag between the increase in the money income of the white-collar workers and professional people and the increase in costs of food, clothing, and other necessities.

Ludwig von Mises, Inflation and You

Sorry, I was a Communications major in school, so this isn’t my area. :P

I agree with you that there are political aspects to increasing production that I passed over mainly because the post was long enough already. ;)

The petroleum industry is a strange animal precisely because much of the production is done by governments or nationalized companies. This results in production decisions being made to satisfy political concerns rather than as a result of economic calculations.

I also agree that speculators are not driving the cost up. If they were, you’d see oil inventories going up, and they’re not. It’s not like someone is buying oil and squirreling it away in secret underground caverns. I think the real impetus behind rising prices is that there are people with large cash inventories who are willing to spend it to get oil and are bidding up the prices. These cash inventories are the indirect product of the FED running the printing presses.

I think in the case of oil, you’re making it far too simplistic. The problem that I see is you argue that the speculators keep oil off the market to encourage more production.

The problem is that it’s not happening in this case. And until either domestic production gets ramping up again (with drilling on the continental shelf, ANWR, or whatnot), foreign producers increase their production, or both, this theory is hard to apply. I think everybody knows there’s a political aspect of it that you haven’t considered here, whether it’s the unwillingness of Congress to allow more domestic production, the war, or strained relations in the Middle East.

I think what is written here would work for a commodity not so politically embroiled. It’d be perfect in a true laissez-faire society, but in reality, it’s a lot more complicated.

I can only assume that there are no comments at this time because nobody is capable of refuting your ideas.

Great post!