Rip up your textbooks, the doubling of oil prices has little to do with China's appetite by Anatole Kaletsky

(posted at They're wrong about oil, by George | Anatole Kaletsky - Times Online ...any comments anyone?)

Just as the credit crunch seemed to be passing, at least in the US, another and much more ominous financial crisis has broken out. The escalation of oil prices, which this week reached a previously unthinkable $130 a barrel (with predictions of $150 and $200 soon to come), threatens to do far more damage to the world economy than the credit crunch.

Instead of just causing a brief recession, the oil and commodity boom threatens a prolonged period of global “stagflation”, the lethal combination of high inflation and economic stagnation last seen in the world economy in the 1970s and early 1980s. This would be a disaster far more momentous than the repossession of a few million homes or collapse of a couple of banks.

Commodity inflation is far more lethal than a credit crunch for two reasons. It prevents central banks in advanced economies from cutting interest rates to keep their economies growing. Even worse, it encourages the governments of developing countries to turn their backs on global markets, resorting instead to price controls, trade restrictions and currency manipulations to protect their citizens from the rising costs of energy and food. For both these reasons, the boom in oil and commodity prices, if it lasts much longer, could reverse the globalisation process that has delivered 20 years of almost uninterrupted growth to America and Europe and rescued billions of people from extreme poverty in China, India, Brazil and many other countries.

That is the bad news. The good news is that the world is not as impotent as is often suggested in the face of this danger, since soaring commodity prices are not the ineluctable outcome of some fateful conjuncture of global economic forces, but rather the product of a typical financial boom-bust cycle, which could be deflated - especially with some help from sensible political action - as quickly as it built up.....(see link for rest of article)

see also U.S. Congress could ban speculators from commodities - International Herald Tribune -
WASHINGTON: The chairman of a Senate oversight committee has said he is considering legislation to place limits on large institutional investors in commodities markets, which have posted record prices this year in agricultural products and oil.

The legislation would be aimed at speculators and other investors who use commodities as a way to hedge against swings in other investment instruments like stocks and the dollar, said Joseph Lieberman, chairman of the Senate Homeland Security and Government Affairs Committee, at a hearing Tuesday.