I would say that the recent price hike in oil is mostly due to weakening dollars - monetary excess ( "inflation" rather than "price increase" due to real supply and demand concern). If the dollars is somehow strengthened to the level of gold you would see the price of oil dipping significantly. Of course, when we're hit with real shortage of oil which will probably happen in decades from now, there will be a massive price increase or a combination of "price increase" and "inflation" from monetary excess.
Inflation 101
Why does money have value? Quote:
This inflation of the currency causes people to want to get rid of their money as quickly as possible. Inflation, and the rational way citizens react to it, causes great misery for an economy.
The key cause of inflation is increases in the supply of money. Inflation can occur for other reasons. If a natural disaster destroyed stores but left banks intact, we’d expect to see an immediate rise in prices, as goods are now scarce relative to money. These kinds of situations are rare. For the most part inflation is caused when the money supply rises faster than the supply of other goods and services.
So to answer your question, money has value because people believe that they will be able to exchange their money for goods and services in the future. This belief will persist so long as people do not fear future inflation. To avoid inflation, the government must ensure that the money supply does not increase too quickly. |