Monday, June 27, 2005


The Dow Jones Industrials Average has lost 325 points, or 3% of its value in the last week. Meanwhile the price of oil ended the day at a record $60.47.

The proximate cause of today’s upward jolt in oil prices was the outcome of US policy to encourage democracy in the Middle East. After all, Iran’s new president elect, Mahmoud Ahmadinejad upped oil’s terror premium by claiming “It’s Iran’s right to develop nuclear energy.”

We should put the latest market jolt in perspective – after all last Thursday, the market dropped 166 points after oil hit $60 a barrel and FedEx announced that revenues were less than anticipated because it could no longer pass along to customers a fuel surcharge big enough to offset its rising fuel costs.

My conclusion is that what moves markets remains a big mystery. However, it is always disquieting when such a yawning gap opens up between what the government says and what actually happens. In his 2005 inaugural address, the President claimed that
our security depends on the spread of democracy. Iran’s latest announcement contradicts that.

Alan Greenspan’s comments on the economic impact of higher oil prices create a complex challenge in setting interest rates: Should Greenspan raise rates more to offset the inflationary effects of higher oil prices or will a rise in interest rates just add more pressure to high oil’s economic brakes?



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