The price of oil was falling sharply on Tuesday after traders stopped worrying about former Hurricane Gustav’s winds, but by at least one calculation it remains very pricey - that is, its link to the price of gold.Some market watchers argue that there is a long-term relationship between the prices of the two commodities. Roughly speaking, this theory would have 10 barrels of crude oil costing the same as one ounce of gold.  Back in March, for example, gold hit a record of $1,030 an ounce and a barrel of oil brought around $105.

By July, however, gold had fallen and oil had risen to the extent that the ratio was not 10 to 1, but 5.9 to1. Some argued at the time that hedge funds noticed this and began to short crude. With the latest tumble, oil is about 27 percent below its high. But against gold, the ratio is still at 7.4 to 1.

The problem is that gold won’t stop falling either, which rather undermines the ratio theory. Perhaps it is all just hooey. If it is not, however, oil would have to dive another 25 percent to reach equilibrium of $79 a barrel against today’s gold price.

Do oil price spikes cause recessions? It is a controversial question and one that is very much a propos. It is all very chicken-and-egg, of course. If oil is soaring because of overheating economic demand, is it the demand or the ensuing rise in oil prices that causes the crash?

Britain’s Centre for Economic Policy Research has had a go at trying to answer this with a report written by Natalie Chen and Andrew Oswald from the University of Warwick and Liam Graham from University College London. The twist was that the academics used terrorist incidents as an instrumental variable. Roughly, they looked at the impact of a sharp rise in oil prices on the profitability of various industries. By using terrorist events, they stripped out macroeconomic drivers and focused on something that was separate from the business cycle.

The researchers say their findings are not definitive but that they “lend” support to the claim that oil-price spikes can be a source of recessions. They urge caution, however, in the absence of study on the impact of microeconomic mechanisms linking oil to recessions. That may be the key to unravelling the oil-macroeconomy relationship, they conclude.

It’s not all doom and gloom — just ask steelmakers.

Germany’s ThyssenKrupp and Salzgitter have both raised their profit forecasts, fuelled by demand from fast-growing China, India and Russia. Profits are soaring on sky-high prices for rolled and flat steel.

Both companies are cashing in on growth outside Europe, and they join Hochtief and Kloeckner who this week also showed that industrial Germany is insulated against a global economic slowdown.

British water companies announced a plan earlier this week to
increase household water bills by up to 4.5 percent above
inflation between 2010 and 2015.

A pain for households, yes. But such increases underline a trend
that may prove tempting to investors searching for new commodity
assets as oil, gold etc tumble from their peaks.

The water index on the International Securities Exchange, which
includes companies engaged in water distribution, water
filtration, flow technology and other water solutions, has risen
more than 5 percent since January.

World water consumption could also double over the next 20 years
– according to a report from rating agency Moody’s economic
research arm — and at current growth rates, water demand by
2025 would exceed the available supply by 56 percent.

Water demand could rise because of climate change which trigger
more frequent droughts, increased migration to cities and
industrialisation of emerging economies.

Desalination could offer one supply-side solution, although it’s
costly. “(It) requires large amounts of energy as well as
specialised and expensive infrastructure. Yet as fresh water
grows scarce, this could become more common,” says Christin Li,
economist at Moody’s economy.com.

But is it a liquid asset?

European industry is suffering under soaring energy costs. Profit warnings are becoming more common and industry leaders predict plant closures and job losses may follow.

Companies say they are doing all they can to improve their game but want government help.

Britain’s Castle Cement, part of Germany’s Heidelberg Cement, is a case in point. Its cement furnace in Stamford, England, is replacing much of its coal with  alternatives  — tyres, bone meal, paper – as $140 a barrel oil sends all fuel costs skyrocketing.   

Industry says tax cuts and energy market reform is needed. Big energy users also want an easing in EU plans for tough CO2 emissions cuts, arguing the measures will simply put them out of business and shift production to places like China which have less efficient and more environmentally damaging production processes.

So, are governments doing enough to support the continent’s core industrial base?

Should certain sectors of the economy be singled out for special support?

Will planned European CO2 cuts, which are not matched by the U.S. and China, wreck the continent’s industrial core without helping the environment?

Are steel companies really hurting from huge rises in the price of raw materials like iron ore? The biggest miner BHP Billiton reckons they aren’t and hopes to sway anti-trust regulators who are reviewing its takeover bid for rival Rio Tinto.

Steel firms from China to Japan to Europe have cited rising raw material costs as they ramp up prices, with Germany’s Salzgitter the latest to push the blame upstream.

Rio Tinto agreed record prices rises with China’s Baosteel on Monday that nearly doubled the price of iron ore this year under long-term contracts and BHP may try to get even more .

Raw material costs, however, only make up about 30 percent of the price of hot rolled coil steel, a figure which has not changed much over the past seven years, BHP Billiton Chief Executive Marius Kloppers argued at a presentation on Tuesday.   

During the same period, iron ore prices have jumped 382 percent, metallurgical coal is up 599 percent and manganese ore is 486 percent more expensive. Tightness in the steel market is to blame for steel prices that have more than tripled and have allowed steelmakers to pass on all the the raw material costs to consumers, Kloppers said.   

“It basically shows that the very high steel costs have been driven almost entirely, certainly in the majority, by constraints on steelmaking capacity, and not raw material
costs,” Kloppers said.  

He was floating an argument he hopes will win the day as BHP seeks competition approval for a marriage of Rio and BHP, the second and third biggest iron ore producers respectively, which will command over a third of the seaborne iron ore market.    

Steelmakers have vowed to oppose the all-share takeover offer worth $170 billion, while BHP argues that they are enjoying healthy margins despite the price rises in raw materials. Watch this space.

Here’s a look at the average daily volume of oil futures on the NYMEX expressed in terms of global consumption of oil. As the chart makes clear, the number of paper barrels traded every day on the NYMEX is now over three times the number of actual barrels consumed every day worldwide. On Friday, as oil surged to a record $139 a barrel, the volume on the NYMEX was over 5.2 times average daily consumption. The chart gives some indication of the boom in oil and commodity futures in general.