There is something changing in our world. The oil price has been on the rise without end. A barrel costing nearly $120, a new record. This has been especially costly for US airlines, several went into bankruptcy, others are reconsidering their strategy. Northwest Airlines and Delta Airlines announcing a merger, United, American Airlines en US Airways talking to each other. European airlines are still reporting profits. For American companies all the “bad things” come together.

It started off with the subprime crisis last year. Banks have become increasingly risk averse and are careful lending out money (to other banks). The American central bank (Federal Reserve or Fed) stepped in and assured liquidity to the market. As a result the US interest rate has fallen, while the interest rates elsewhere remained nearly unchanged. The Dollar has been a downward slope, noting $1.60 for 1 euro last week.

There are two effects that jointly eat corporate profits. The subprime crisis has reduced appetite for lending, and increased consumers’ and producers’ awareness of a looming recession. This in itself is a self fulfilling prophecy. Furthermore, the price of imports have automatically risen as the Dollar fell.

The price of oil is a special case: as it is denoted in Dollar, oil has become cheaper for non-Dollar economies. As a result more oil can be bought for the same amount of domestic currency, driving up the price in Dollar terms. For the rest of the world the net effect might then be zero, for the US it is costly.

The next few months will be interesting… is the Fed keeping their monetary policy as loose it is now, risking a further rise in inflation? What if confidence will remain shaky… then its recent string of interest rate reductions will be ineffective, and thus costly. Will there be a fall out to the rest of the world? This might reduce inflation in Europe, giving the ECB room for a looser monetary policy. As a consequence Dollar should rise versus the Euro. The Fed must be crossing its fingers.