Oil prices and the end of QE.

• Author: Verleger, Phil
• Position: Off the News

Global oil consumption has stagnated while productive capacity has increased. Yet rices have remained high. OPEC discipline may explain this. However, quantitative easing is more likely the cause. Zero interest rates encourage inventory building. Stocks held by U.S. firms have diverged from their normal trend by as much as 250 million barrels (18 percent) since the beginning of quantitative easing. The accumulation removed downward pressure on prices. Absent quantitative easing, prices would be $50 per barrel, not $100 per barrel.

The oil industry responded to the high interest rates in the early 1980s by liquidating inventories. As the cost of holding $40 per barrel stocks rose from $0.25 per barrel per month to $1 per barrel per month, U.S. firms shed more than 300 million of barrels (20 percent of stocks), as did firms in the rest of the world. Prices fell by 75 percent.

Today, companies are doing the opposite. Awash with cash...