We are still far, far from stagflation. We have yet to post even one quarter of negative GDP growth, and while inflation is beyond our comfort level, it is still metrics away from the Jimmy Carter days of double-digit inflation. Further, the high oil prices are not near as felt today in the US as they were in the 70s, thanks to de-industrialization.
China is the one that is really worried, as they are far more manufacturing oriented than even the US in the 70s. The state has gone so far as to freezing (basically subsidizing) prices, which is causing a revolt from the Chinese oil companies. The state is in a precarious position since a wave of business failures would be a disaster and provide plenty of unrest. They know this since the financial system has been capitalizing interest for years which has led to a wave of non-performing loans. The gas subsidies are coming from depressing margins on exports, so while the global economy is slowing and importing less, the state is taking more of the profits, and the state's reserves are dwindling from the non-performers while taking incentive away from production. This could be a train wreck, and in order to build reserves, one easy option is selling US treasuries. Of course, with the return low and the dollar in the ditch, it is a less attractive option than in a normal business environment, so while making it less fun to go to London or Paris right now, the lower dollar and weaker economy has attracted foreign capital and made it less attractive for liquidating treasuries. I'd still prefer the Euro model, but since maintaining employment is a wrongheaded task of the Fed, we might get lucky this time.
The states benefiting are obviously the exporters. Iran is the 5th largest exporter of oil, but the second largest importer, so it's basically a wash for them but it has put some strain on the leadership and the mullahs. The Saudis are the real winners here. Unlike the Nigerians, Indonesians and Venezuelans and some other less developed countries, they can put the money to use. They are spending money stabilizing the Middle East. The are supporting Israel-Syria peace talks, they are encouraging Sunnis in Iraq to smoke out al Qaeda, and they are keeping the Shiites flush with cash to take away Iranian influence and incentive to shut the Strait of Hormuz. All the while they are re-establishing relations with the US that were hurt after 9/11.
In the US, the oil price increase hurts, but it's a wash on our overall economy since we are still one of the largest (I think the largest) exporter of grain, so the benefits from the increases in food prices are balancing the negatives from the increases in oil prices.
Through all this, Russia is starting to scare the hell out of me. And we can't find a politician to endorse more drilling in the US, ANWR or off our coast or other shorelines. Long term we'll trend towards less fuel consumption, but unless this mother of all bubbles of oil bursts soon, James Bond might start making movies again.
But what the hell do I know? It's more fun to bash Evil Dick Cheney.
No Blood For Oil!
