JAMES HAMILTON is an excellent economist and blogger, but he's confounded me today. In a post

examining

Instead I believe that the price of oil, like the price of all the other storable commodities, and for that matter the dollar cost of a euro, is primarily responding to the Fed's decision to move the real interest rate strongly into negative territory.

the roots of the recent surge in oil prices, Mr Hamilton displays a number of charts which seem to clearly indicate the extent to which petroleum production has stagnated--not just in recent months, but over the past few years--even as global demand growth has proceeded apace. He then goes on to note that this has practically nothing to do with increases in oil prices:

This is an argument Mr Hamilton has made before. Because the Federal Reserve has reduced nominal interest rates so significantly in an inflationary environment, real interest rates are negative. As such, the best way to generate value with one's money is to keep it in storable commodities. Presto: commodities price boom!

I wouldn't be surprised if some small portion of the oil spike had something to do with this kind of investment play, but I think it's difficult to square the facts with Mr Hamilton's assessment that most of the boom can be explained as such. Why?

First, we aren't lacking for explanations for the broader commodities price boom, to the extent that interest rate stories should be invoked. Increasing demand and slow supply growth are key factors for oil, food, and metals. Moreover, the increases for those categories aren't independent of each other. Dear oil makes extraction, cultivation, and transportation of commodities more expensive.

Second, much of the run-up in oil prices precedes the recent, rapid monetary easing pursued by the Fed. The yield on the 5-Year Treasury inflation-indexed note didn't go negative until the very end of February, 2008, at which point oil prices had already crested the $100 per barrel threshold. What's more, those yields have been ticking back toward zero over the past two weeks, just as oil exploded to new records, above $115 per barrel.

One reason why those yields have moved up is because it is widely expected that the current cycle of Fed easing is essentially over. A quarter point cut, to 2 percent, is likely at the upcoming April meeting, and the market does not see Ben Bernanke moving below that level. Mr Hamilton writes:

The Fed has a golden opportunity to prove me wrong. Fed funds futures prices currently reflect an expectation that the Fed will make one more cut to 2% at the meeting at the end of this month, and then stay there. Here's a prediction for you. If the Fed surprises the markets by holding steady at 2.25%, all those commodities will begin to crash within hours of the news.

And I predict that if the Fed did surprise by holding the rate steady, oil might crash--all the way back to $100 per barrel.