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Editor’s Note: The world of cheap fossil fuel no longer exists, says Bill Bonner in The Daily Reckoning. The price of oil has doubled since 2001. It’s now time to build a world designed for costly crude…

There’s no time like the present. Crude oil prices are at all-time records today. Over $141 a barrel.

The Fed’s no-decision decision on rates hasn’t helped bring down sky-high crude oil prices. Nor has it’s non-committal commitment to keep an eye on inflation.

“The Fed isn’t fighting inflation at all,” says Bill. “It’s fighting another ghost from the past — deflation. You don’t lend money at less than half the level of consumer price inflation if you’re fighting inflation.”

Stayin’ Alive in the New ’70s

By Bill Bonner

We live in a world powered by fossil fuel and designed — particularly in America — for a time when it was cheap and plentiful. Too bad that world no longer exists. Instead of building the world of the future, we built the world of the past. Now, we have to turn our backs on it, move on, and rebuild. This time, we have to build a world designed for oil that is significantly more expensive.

“Our civilization is based on fossil fuel,” writes Martin Wolf in the FT. “But since the end of 2001, the real price of oil has risen some six-fold. Today the real price is higher than since the beginning of the previous century.”

How expensive will it get? We don’t know. Our guess is that it will go down, not up, but still end up about twice as high as the price five years ago. T. Boone Pickens says oil output worldwide is peaking out. And never before have Americans had to compete with so many other people for it. Back in the early 20th century, a roughneck could sink a well in West Texas and have the oil all to himself. Now, there isn’t much oil left in Texas… and what little there is has to be shared with three billion people, many of them with incomes rising a lot faster than ours. If Pickens is right, it stands to reason that the price will probably be higher than it used to be — in real terms.

That prices are rising in nominal terms should come as no surprise either. For many years, central banks have increased money supply faster than the rate of GDP growth — often several times faster. Now that this monetary inflation is turning into consumer price inflation, no one likes it very much. But the only way to stop it is the Volcker way — that is, pushing up rates and forcing a recession. People would like that even less.

Already, the world’s capital markets are deflating. While prices for commodities and oil have risen steeply this year, stocks in Britain and America are down about 11%. Stocks in Europe have fallen even more — about 18%. And in Asia, markets have been beaten up and beaten down. The Shanghai market has lost 44%. Hong Kong is off 18%. And Vietnam has been whacked — down nearly 60% from the peak.

In America, the average stock may be down only a little more than 10%… but some industries have been hit much harder. Airlines, for example, are falling out of the sky. Finance is down about 40%. And homebuilding? Don’t even ask…

So, for now, the Fed isn’t fighting inflation at all; it’s fighting another ghost from the past — deflation. You don’t lend money at less than half the level of consumer price inflation if you’re fighting inflation. You only do when you see the ghost of the ’30s hard on your heels. Yesterday, the Fed must have looked back… seen the spectre of deflation… and decided to leave rates were they were.

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About the Author

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning and three best-selling books, Financial Reckoning Day: Surviving The Soft Depression of the 21st Century, Empire of Debt: The Rise of an Epic Financial Crisis and Mobs, Messiahs and Markets..

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The Daily Reckoning offers a "uniquely refreshing" perspective on the global economy, investing and the ability to live well in uncertain times. You will learn what you can expect from today's markets and how to prosper in the face of uncertainty.

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