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Monetary Policy and Crude Oil

Prices, Production and Consumption

Basil Oberholzer

The global crude oil market is critically important in many respects. It is the fuel that drives the global economy and, as such, is the focus of climate policies. Moreover, crude oil is the basis of a tradable financial asset. It is therefore connected to several outstanding macroeconomic developments of recent years, including financial market fluctuations, the financial crisis and the exceptional conduct of monetary policy. This book investigates the impacts of monetary policy and the financial system on the global crude oil market. Furthermore, it outlines how monetary policy may also be used to guarantee stability and to contribute to ecological sustainability.
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Prices, Production and Consumption

Basil Oberholzer



We have outlined a policy proposal that takes both the stability and the ecological sustainability issue into account by combining the currently existing policy ideas. In particular, monetary policy is coordinated with fiscal policy. An oil price target is set and achieved by intervention of the central bank in the futures market along the lines of the use of the strategic petroleum reserve. As a difference, trading futures contracts, instead of physical oil, allow for more flexibility and better fine-tuning. To prevent imbalances in the spot market, a tax is imposed on oil production. Once the oil price target is achieved, stability in the oil market is guaranteed and speculation is ruled out. By increasing the oil price target step by step to a higher level, oil consumption can be decreased, which is in favour of climate protection. Stability is also established for the rest of the economy, since it becomes clear that investing in oil-consuming equipment will no longer be profitable in the future. Uncertainty with respect to the oil price is removed and it is obvious that investment in renewable energy sources and energy efficiency is sustainable in an ecological as well as economic sense. The insight that the futures and spot market are integrated, so that spot and futures prices move closely together, allows the use of the futures market for economic policy. The proposition at hand makes use of the mechanisms of money and monetary policy that have been examined in this book. Combining...

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