Removing All Doubt

Oil prices jumped above $106 per barrel this week. What gives? The short answer: global supplies are tightening while consumption is increasing.

“Energy economists continued to gauge how recent unrest in Libya, Bahrain, Yemen and Syria will affect exports from a region that produces 27 percent of the world’s oil,” explains AP.

Obviously, it will affect exports negatively. From what we gather, Libyan oil exports are shut down. Without Libya and other North African oil producers contributing to global supplies prices could really go haywire. Particularly when demand is picking up in earnest…

“Platts reports that China’s oil demand in February rose 10.1 percent from a year ago, to the second strongest level on record. It hit an all-time high in December. China is the world’s second biggest oil consumer behind the U.S.”

As supply stagnates and demand continues to increase speculators will do their best to push prices up like they did in 2008…when oil topped $140 per barrel. You can count on that.

Cutting Off the Economy at the Knees

Iraqi oil minister Abdul-Kareem Luaibi said Tuesday that $120 a barrel is “an acceptable price.” Markets, nonetheless, may think otherwise. At that price, according to Merrill Lynch commodity analyst Sabine Schels, the breaking point for the global economy will be reached…

“Whenever the size of the energy sector in the global economy reached 9 percent,” says Schels, “we went into a major crisis. It was in the 1980s and it was the same in 2008. […] if you go above $100 per barrel to $120 per barrel, you get to that 9 percent level.”

At $106 we’re just a stone’s throw away from $120. With all the gusto that’s gone into turning the economy around over the last several years we’d like to avoid hitting another economic breaking point. Particularly, since the economy never seemed to really turn around at all. In fact, for many, there was no recovery. Economist Gary Shilling explained this week that the reason many people are not feeling a recovery, is because it has been a “two-tiered recovery.”

“The last few years we had a revival of all the markets that were crushed during the recession…and anybody that was participating in that – in and out of Wall Street — has done very well,” said Shilling. “But the rest of the economy has pretty much been lagging and those are the people that are reflected in the high unemployment rate.”

So now that the labor market’s finally starting to improve, an oil price run-up could cut the economy off at the knees.

Removing All Doubt

No doubt oil prices are being affected by geopolitical events in the Middle East and fears of supply disruptions. But the true instigator of rising oil prices is the Federal Reserve. The consequences of their deliberate policies of dollar debasement are reflected in oil prices.

Back on November 3, 2010, the day Federal Reserve Chairman Ben Bernanke announced he would be using debt to buy $600 billion in debt, oil cost about $85 per barrel. Since then it has increased over 24 percent. Yet nearly all the Federal Reserve Presidents fall in line with Bernanke…

“If [the rising price of oil] plays through to the broad economy in a way that portends a recession, I would take a position we would respond with more accommodation,” said Atlanta Federal Reserve Bank President Dennis Lockhart recently. Evidently the man has mush for a brain if he doesn’t see that it’s his own organizations very policies that are bringing about rising oil prices…more accommodation will only make things worse.

But within the madness of the Federal Reserve there may be a voice of sanity. Finally someone at the Federal Reserve is willing to go against the status quo…

“The Fed has done enough, if not too much, and we should do no more,” said Dallas Federal Reserve Bank President Richard Fischer on Tuesday. “In my opinion no further accommodation is necessary after June either by tapering off the bottom of treasuries or by adding another tranche of purchases outright.”

Still Fischer has an uphill battle to win over his cohorts. Here’s what we mean…

Earlier this month, New York Federal Reserve President William Dudley opened his mouth and removed all doubt that he’s a fool. While explaining Federal Reserve policy in Queens, and how inflation was of no concern, he used a splendid example to illustrate his point…

“Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful. You have to look at the prices of all things.”

“I can’t eat an iPad,” retorted someone in the audience.


MN Gordon
for Economic Prism

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