What is the price of Oil telling us?

by Laura Ehrenberg-Chesler on October 7, 2010

in currencies,Economic Indicators,Employment,Energy

Since the middle of September, the price of oil has been going up.  Today, it sits just above $81.50.  If we are still in a recession, or slow growth economy, why would the price of this most important commodity be rising?

One reason is the declining value of the dollar against other major currencies.  This move has been exacerbated by the suggestion from the Federal Reserve that they may implement their second round of Quantitative Easing.  Hence, interest rates and the dollar move lower, and the price of oil moves higher.

But, there is another reason.  The price of oil may be presaging a more robust economic recovery, here and abroad.  Tomorrow we will get the non-farm payroll number.  If it is a little better than expected, the per barrel price of oil could continue to climb.   The idea being not too hot, not too cold for economic growth.   If the number is much better than expected, and the implementation of QE II is called into question, the dollar may strengthen and cause the price of oil to drop.

Either way, the price of oil is an important economic indicator and needs to be watched for all of its implications for the global economy, the dollar, and interest rates.

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