Haig Bathgate: Oil price increase not as sharp as dollar value suggests

Monday, September 17, 2012

The recent surge in oil prices isn’t as severe as first impressions convey, due to underlying currency factors, according to Chief Investment Officer Haig Bathgate.
 
Many commentators have said the most recent announcement of quantitative easing in the US has helped propel oil prices higher. That’s because the resulting increased expectations for the economy mean there will be higher demand for energy. Rising tensions in the Middle East after the killing of the US ambassador to Libya have also helped strengthen prices.
 
But there are other factors that need to be taken into account. Quantitative easing, which in effect means the US prints more banknotes, leads to a reduction in the value of the dollar against other currencies. As oil is a real asset priced in dollars, its dollar price needs to climb just to maintain its value. However, since the dollar is slipping against sterling, the effect of the increase is less pronounced in the UK.  It’s also worth noting that the dollar price of oil is only back to levels last seen in May.
 
Unfortunately, the protection afforded by the pound won’t last long. The precarious state of our public finances means that sterling is likely to decline against other currencies, including the dollar, in the months to come. This will eventually increase the price we pay for oil in the UK. The higher cost will, in the end, push up the inflation rate quite markedly.
 
Haig discussed these issues today with the BBC’s Waseem Zakir on Good Morning Scotland.