The crash in oil prices over the past year is yet another clear-cut example of misallocation of resources caused by low-interest rates imposed by central banks, but to determine the solution to these misallocations we must determine, not just the cause, but the root cause.
As with tech companies in the ‘90’s, and housing in the 2000’s, oil exploration and production deserves investment. It is the markets job to take in all available information and signals to determine the level of that investment. When rates are artificially held too low these signals are distorted and the market cannot properly allocate capital. Investors who might normally invest in a safer asset with a reasonable rate of return are forced to look to alternatives when the Federal Reserve holds rates down with ZIRP and or QE. Those alternative investments may be a questionable tech company, condo’s in Las Vegas, or bonds in a fly by night shale drilling company.
