QE2 is responsible for higher oil prices: Xie

The Federal Reserve's second round of quantitative easing (QE2) is pushing oil prices higher, said Andy Xie, a prominent economist in a Caixin op-ed. Oil prices have rallied 20 percent since the Fed first hinted that it will roll out the program.

Xie said the oil rally is not powered by demand from the real economy because oil consumption is only up by possibly one million barrels per day in 2010 compared to 2009. Moreover, 2010's consumption level is still far below those from 2007 or 2008.

Instead, financial speculation, fueled by the rise in money supply via QE2, is responsible for the increase.

Looking at 2011, Xie thinks oil prices will rise slowly in the first quarter. By mid-year, it may decline as global economic data becomes less favorable. Then, as the government begins to mull more stimulus measures, oil will rally again.

Xie believes that the economy in 2011 will behave much like it did in 2010: performing well in the beginning, running out of steam by mid-year, and picking up again as the government begins talk of more stimulus measures.

As oil prices rise to higher levels, Xie does see two headwinds.

One, producers will be more willing to increase the supply in response to higher prices. Two, consumers may cut back spending.

However, before either occurs, Xie thinks oil speculation may prove to be a profitable move.

Email Hao Li at hao.li@ibtimes.com