Oil Prices, Interest Rates And War
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The Financial Times recently reported that President Trump is encouraging OPEC producers to boost supply:
Donald Trump has called on Opec to push down global oil prices and insisted that central banks around the world lower interest rates “immediately” afterwards.
In a speech to executives in Davos on Thursday, the US president urged Saudi Arabia and other producers to lower the cost of crude oil, expressing dismay that they had not done so already.
“I’m going to ask Saudi Arabia and Opec to bring down the cost of oil. You gotta bring it down. Which frankly I’m surprised they didn’t do before the election,” he said.
“Right now the price is high enough that that war will continue,” he said, referring to Russia’s full-scale invasion of Ukraine and suggesting that the elevated oil price was helping to sustain Putin’s war machine.
“You gotta bring down the oil price, that will end that war. You could end that war,” he added.
Oil prices seemed to have declined slightly on the news.
I have mixed feelings regarding these claims.In the past, I’ve argued that we should remove those sanctions on Iran and Venezuela that restrict their ability to export oil.I suggested that this would be the most effective way of helping Ukraine in its war with Russia and North Korea, as it would reduce the revenue flow that helps Russia finance its war machine. Trump opposes that sort of sanctions relief, but if OPEC were to respond as Trump has suggested, I believe that this would also help Ukraine, for similar reasons.
I am less confident in the interest rate claim.It is true that lower inflation often leads to lower nominal interest rates.But the correlation is mostly between demand side inflation and interest rates.The Fed tends to “look through” changes in inflation due to price shocks in a single industry, and focuses instead on movements in the core rate of inflation, which is assumed to reflect the underlying trend. It’s possible that lower oil prices would have some effect on interest rates, but I suspect that the effect would be extremely small.
Despite my reservations, it’s nice to see Trump appreciate the advantages of cheap imports of a good where the US is a major producer.
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