Who’s to blame for oil’s latest run above $100 and the resulting pain at the pump for Americans — speculators, emerging market demand, or the Federal Reserve?
The Fed generally blames increasing foreign demand and insists that high prices are “transitory,” meaning inflation will crimp growth abroad and lead to declines.
Meanwhile, the Commodity Futures Trading Commission points the finger squarely at speculators, charging a group of them this week with withholding crude in 2008 to manipulate the price, making $50 million.
The barrel price briefly touched $147.
Both Nymex and WTI crude are trading at $100 a barrel. Brent crude is at $115. Americans pay a price that is a mix of these two, plus whatever delays and inefficiencies occur in refining and shipping. The flooding in Louisiana, for instance, is likely to goose up gas prices short term.
But former Federal Reserve official Vincent Reinhart says you need look no further than the Fed itself. He makes the case that the Fed and Chairman Ben Bernanke’s massive quantitative easing (QE) policy is at least partly to blame for the high price of oil.
“The Fed gambled that the benefits of the stimulus of QE to financial markets would offset the adverse effects of oil price developments,” Reinhart told Congress in testimony. “Whether that gamble pays off is yet to be proven.”
Reinhart, a former director of the Federal Reserve Board's Division of Monetary Affairs, is a resident scholar at the American Enterprise Institute.
The correlation is simple: The Fed has held down the interest rate on Treasurys by buying them up using its virtual dollars. The decline in safe income has forced investors to speculate, that is, to put money into the private sector rather than government bonds, which was the Fed’s intent. That has driven up the price of most commodities and stocks as well.
The central bank wants to avoid chaotic deflation, so it seeks to create inflation in the short term by encouraging private capital into risk. Left unsaid is what might happen if the Fed takes away its support, as scheduled to occur in June, or how likely inflation will remain short term.
But, as the Fed’s actions drew money out of long-term, fixed income investments, it created a global flood of greenbacks, which naturally weakens the dollar. Since oil is priced in dollars, producers were forced to charge more to stay even.
Major oil suppliers, such as ExxonMobil CEO Rex Tillerson, say they see no relationship between supply and price these days. Speaking to the Senate about oil industry tax subsidies, he said he thinks oil should be between $60 and $70 a barrel right now and blamed futures speculators for recent high prices.
In a recent speech, James Bullard, president of the St. Louis Fed, suggested putting oil back into the Fed’s inflation equation, since world demand is likely to increase faster than supply.
“It is at least a reasonable hypothesis that global demand for energy will outstrip increased supply over the coming decades,” Bullard said. “If that scenario unfolds, then ignoring energy prices in a price index may systematically understate inflation for many years.”
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