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I have a theory regarding high oil prices and interest rates and I would like to discuss it with you guys.

So far we mainly hear that interest rates won't go up as long as oil prices remain high because it would put additional load onto an already suffering manufacturing industry.

I for one don't think that this is the whole story. I believe that rising energy prices have the potential of raising inflation expectations and therefore interest rates will have to go up. I base my theory on what happened in 2000 when oil prices went up. Interests went up as well. The impact is quite simple. As Ghotib already pointed out, it starts having an effect on areas which you wouldn't think at first. If money remains cheap, then things will start to get out of hands. Costs will go up too quick and money is losing buying power as you won't get much for it in exchange anymore. If the US economy can't grow, then the dollar will drop in value, supporting my idea that this will have to lead to an increase in interest rates.

Now the US has released their Strategic Petroleum Reserve (SPR). That will probably have an impact and already oil has dropped a bit. But since the oil released from SPR has to be replaced, the release is simply a timing shift. Without any further action the problem will return. China will only get bigger and so will India. How much room does that leave for the US economy to recover under these difficult circumstances?

Long story short, I believe there is a big problem ahead. Interest rates will have to keep going up, even so the world economies didn't have time to fully recover.

Happy trading

Stefan