Don’t Blame the Fed for Oil Price Spikes

June 8th, 2011 at 10:26 pm | 24 Comments |

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Congressional Republicans are having difficulty keeping their stories straight when inventing politicized explanations for high oil prices.

When they are not complaining that insufficient domestic production is the cause of high prices, they’re busy blaming the Federal Reserve for pain at the pump.

Ben Bernanke is too free and easy with the money supply, they argue, driving down the value of the dollar and consequently putting upward pressure on the price of oil.

At a Tuesday speech to the International Monetary Conference in Atlanta, Bernanke – in his measured, academic, and carefully non-partisan way – essentially told congressional Republicans that their dollar-price hypothesis is little more than the product of vivid imaginations. As if he were back at Princeton instructing a group of Econ 101 neophytes, Bernanke delivered a lecture that was as subtle as fingernails on the chalkboard.

“Some have argued that accommodative U.S. monetary policy has driven down the foreign exchange value of the dollar, thereby boosting the dollar price of commodities. Indeed, since February 2009, the trade-weighted dollar has fallen by about 15 percent. However, since February 2009, oil prices have risen 160 percent and nonfuel commodity prices are up by about 80 percent, implying that the dollar’s decline can explain, at most, only a small part of the rise in oil and other commodity prices; indeed, commodity prices have risen dramatically when measured in terms of any of the world’s major currencies, not just the dollar. But even this calculation overstates the role of monetary policy, as many factors other than monetary policy affect the value of the dollar.”

Both Bernanke and the International Energy Agency have attributed the run-up in oil prices to market fundamentals – worldwide supply and demand. Bernanke further said that his critics have their cause-and-effect argument backwards.

“As the United States is a major oil importer, any geopolitical or other shock that increases the global price of oil will worsen our trade balance and economic outlook, which tends to depress the dollar. The direction of causality runs from commodity prices to the dollar rather than the other way around.”

Which underscores the fundamental problem – heavy dependence on a commodity traded in a global market that is significantly influenced by dodgy petro-regimes. Lawmakers should adopt an energy policy that begins lowering our addiction to the sauce, not waste time on distractions that won’t.

Recent Posts by Jim DiPeso

24 Comments so far ↓

  • forkboy1965

    Of course it was just like instructing a bunch of Econ 101 neophyte students…. the GOP hasn’t learned anything about economic policy since the days of Reagan. If they had we wouldn’t have seen record deficits with both Reagan and W.

  • Bunker555

    “Congressional Republicans are having difficulty keeping their stories straight when inventing politicized explanations for high oil prices.”

    “Bernanke further said that his critics have their cause-and-effect argument backwards.”

    Give the Tea Cons credit for shouting the loudest. Bernanke pretty much told them to bugger off.

  • valkayec

    Oh, Bernanke was so cool. I just love it when he instructs the economically illiterate, making fools of them. The one thing he missed is market speculation. According to recent Wall St. reports, oil speculation (such as those by the Koch Brothers commodities trading arm) amounted to 20 to 50% increases in prices, depending upon the individual report.

    When Alex Hamilton was still an important political force in American politics, his brother-in-law, completely unknown to Hamilton, engaged in a speculative venture. In conjunction with a couple of others, he bought up Revolutionary bonds – payment vouchers to soldiers – for pennies on the dollar, telling the soldiers that they may never be paid by the federal government so the best deal was to sell their payment vouchers immediately for far less than their original value. Better pennies on the dollar than nothing at all, they said.

    These guys then held the vouchers for a couple years until the government made good on them. The soldiers lost while the speculators won big time.

    When news of this venture became known – and well publicized – Hamilton’s future prospects ended. His extra-marital adventures aside, this scandal because of his brother-in-law’s involvement and the presumption of Hamilton’s guilt without evidence, ended Hamilton’s political career. In those days speculation of any kind was considered ethically and morally wrong. In other words, good people did not engage in the kind of speculation that might harm other people, even though Abagail Adams, in secret, engaged in plenty of it.

    The point of this historic story is to point out how much American values have changed over the last 200 years.

    • advocatusdiaboli

      Easily duped fan boy. Are you, like 14 or so? “So cool…” You sound like a kid or a mall cop. LOL

      • ottovbvs

        Actually I rather like Bernanke’s style because it is….well….cool under fire. When I’ve seen him giving evidence in front of some of these twits in congress you have to wonder how he keeps his cool. And he actually says something which is more than you could say for his predecessor some of whose statements were as incoherent as those of the “prof”…and yours of course.

  • advocatusdiaboli

    I call Bravo Sierra on this author. While the Fed is not _directly_ responsible, what does he think the banks will do with their near zero percent loans (at taxpayer expense)—just buy T-bills at 3% when they can fund hedge funds speculating in oil to rip off consumers of gasoline for even greater profits? What selfish capitalist could resist. All handed to them by the Fed on a silver patter to keep them solvent given most of them are insolvent or nearly so if they actually marked to market their mortgage debt.Of course if they (as they are doing by the millions) don’t do anything about mortgage holders 8 months or more behind, then the problem is “off the books” and they don’t count it. Vila—they look solvent. The big scam uncovered., What a sham. Obama and Bush alike perpetrated this on us.

  • ProfNickD

    Helicopter Ben said,

    since February 2009, oil prices have risen 160 percent and nonfuel commodity prices are up by about 80 percent, implying that the dollar’s decline can explain, at most, only a small part of the rise in oil and other commodity prices;

    That’s his logic? That inflation has not been even throughout the economy? That’s an “academic” explanation?

    Look, when governments devalue currencies, the resultant inflation does not affect all prices equally. It’s the differential effect on prices (and also therefore on the structure of production) that creates some of inflation’s most pernicious outcomes.

    If inflation increases 6% in a year, it might be reflected in different stages of production as follows:

    Stage 1: 10%
    Stage 2: 6%
    Stage 3: 2%
    Stage 4: 6%
    Stage 5: 8%

    Stage 1 might be commodity producers (i.e., metals mining), while Stage 5 might be retailers. The effects of inflation might result in an suppressed demand on each (both Stage 1 investment and Stage 5 consumption), while the middle stages (e.g., shipping) might have relatively higher demand. Also, the distribution of price increase within each stage would be differential. Stage 5 retailers that are “high-end” (Tiffany’s) might prosper, while Stage 5 retailers that are “low-end” (Wal-Mart) might suffer, or vice-versa.

    But who knows — that’s how awful inflation is. It’s impossible for investors, entrepreneurs and consumers i.e., all of us, to plan or make any assumptions about future prices, meaning, in turn, an unwillingness to take risks in new productive enterprises. Investors and entrepreneurs won’t invest and consumers won’t spend because they have no idea year-to-year or even day-to-day what the future might bring.

    So the question is: how many economies and lives must be wrecked before the world rids itself from this disastrous and decidedly nonacademic Keynesian mentality?

    • ottovbvs

      This of course is all nonsense. The govt hasn’t devalued the currency, indeed as Bernanke points out when commodity prices rise the causality runs in the opposite direction because the terms of trade are worsening for a major world economy like the US. Bernanke is also entirely correct about the fundamentals behind the increase in commodity prices. It’s actually a positive sign in terms of world economic activity. He didn’t mention speculation and it is a factor when markets really start to accelerate and get into bubble mode but relatively unimportant until then.

      • indy

        You mean to tell me that some prices going up 10% in 6% inflation doesn’t really explain a commodity going up 160% in a 3% inflationary environment? It’s total nonsense? You don’t say!

        • ottovbvs

          What else could I say? It was incoherent.

        • indy

          Pretty amazing how often we hear from these economic clowns when they think it reinforces their pet peeves. When oil prices go down 40% under the exact same monetary policies not a word is to be heard.

          Although I do need to correct my 3% inflation figure above: Take out gas prices, and inflation was only 1.2 percent over the past year.

  • Elvis Elvisberg

    Republicans have no policy beliefs. They simply oppose the administration with maximalist rhetoric because the president is not “One Of Us.”

    We know that there’s nothing unusual or nefarious about recent gas prices. Let facts be submitted to indifferent Republicans:

  • SteveThompson

    The demise of OPEC, when it comes, will likely be a result of looming production declines among the nations producing the lion’s share of OPEC’s oil.

    As we already know, Saudi Arabia’s ability to act as the cartel’s swing producer is already compromised according to a U.S. Department of State cable that was released by WikiLeaks. In that cable, Saudi Aramco Vice President of Exploration and Production Mr. Sadad al-Husseini stated that, “…the IEA’s expectation that Saudi Arabia and the Middle East will lead the market in reaching global output levels of over 100 million barrels/day is unrealistic, and it is incumbent upon political leaders to begin understanding and preparing for this “inconvenient truth.”

    Here’s the rest of what Mr. al-Husseini had to say about the ability of both Saudi Arabia and the rest of the world’s ability to produce ever-increasing volumes of oil:

    • ottovbvs

      Actually the demise of OPEC would be great news for the US. OPEC has become something of a battleground between Saudia and the gulf states and Iran. Yesterdays meeting broke up up in disarray because Iran wanted to reduce quotas while Saudia and co didn’t. Consequently they’ll just keep pumping to keep prices contained. You need to learn the difference between the long term and the short. Not that I think that OPEC will break up. All these international cartels and indeed supra national bodies generally give their participants the opportunity to posture on the world stage and whose going to give that up?

  • armstp

    When you have a Republican party that is only interested in politics and winning elections they are entirely working against the good of this country. How can politicians begin to solve the problems of this country when they are so negligently misrepresenting what those problems or issues are? In fact, it is worse as we see over and over again the GOP purposely distorting the truth about the issues this country faces and therefore are working against the common good of this country. They are lying and misrepresenting the truth about the deficit, debt, environment, the dollar, Fed action, energy, oil, taxes, healthcare, etc. etc. etc. The Republican Party is now so far to the right and so political that they have no interest in solving the problems of this country. They are only working to destroy this country. The Republican Party is disgusting. It is not about small government, but about taking down the U.S. What the Republican Party is doing is really unAmerican.

  • Stewardship

    Given that Democrats control the Senate and the White House, I’d say the blame for lack of leadership or progress in dealing with our oil addiction lays at least 66% with Dems.

    • ottovbvs

      I’d say the blame for lack of leadership or progress in dealing with our oil addiction lays at least 66% with Dems.

      What an incredibly profound and insightful comment on the economics of oil. I stand in awe of one such as you.

    • indy

      Sure, we all know how much the dems hate alternative energy sources.

  • armstp


    Through the stimulus bill the Democrats have invested more in alternative energy than all other Presidents before them. I do not see Obama holding hands with the King of Saudi Arabia or Biden allowing the oil industry to write and energy bill.

    Obama on Alternative Energy:

    2.Established an Energy Partnership for the Americas. ref
    3.Established the Biofuels Working Group to develop a comprehensive approach to alternative fuels. ref
    4.Additional measures to advance clean energy/solar investments and job creation (ARRA). ref
    5.Launched new Climate Service. ref
    6.Worked toward deploying a global climate change research and monitoring system. ref
    7.Implemented renewable fuels mandate of 36 billion gallons by 2022. ref

    9.More than doubled federal spending for research on clean fuels. ref
    10.$60 billion in spending and tax incentives for renewable and clean energy. ref
    11.Invested in all types of alternative energy. ref
    12.Increased funding for the Environmental Protection Agency. ref
    13.Invested $2 billion in solar power, hailed new jobs. ref, ref, ref
    14.Established consumer tax credit for plug-in hybrid cars. ref, ref
    15.Provided grants to encourage energy-efficient building codes. ref
    16.Doubled funding for bicycling, walking projects ref, ref
    17.(DOL) Dedicated $100 million in Energy Training Partnership green jobs training grants. ref
    18.(DOL) Dedicated $150 million for Pathways Out of Poverty green jobs training grants. ref
    19.$8 billion combined public/pvt funding committed to develop Smart Power Grid (part of ARRA). ref
    20.Incentivized farmers to use more renewable energy and be more energy efficient. ref

    22.Purchased fuel efficient American-made fleet for the federal government. ref
    23.Ordered 5,000 hybrids for federal fleet. ref
    24.(NIST) Completed first release of Smart Grid framework. ref
    25.Created job training programs in clean technologies for displaced workers. ref
    26.Created Green Vet Initiative to promote environmental jobs for veterans. ref
    27.Established program to convert manufacturing centers into clean technology leaders. ref

    29.First President to create detailed vision for clean energy economy. ref
    30.Wind power growth up 39% due to government stimulus. ref
    31.Study: Almost 5 million charging stations by 2015. ref


  • Graychin

    When Republicans talk about oil prices, isn’t it amazing how they forget completely about free market forces? About that “invisible hand” of free markets that sets prices on the basis of supply and demand?

    You’d almost think they were prevaricating frauds if you didn’t know better.

  • Stewardship

    I agree that this is a bipartisan problem, but every president since Ford has done some form of nickel and dime window dressing. We need big, bold leadership. President Obama had the chance a year ago to push us over the goal line. Instead, he punted.

    Your list, in the grand scheme of things, doesn’t amount to a cup of water in the ocean. Off the cuff, I’d guess that half of the list are earmarks by members of Congress.

    It was GOP presidents who started us on the road to CAFE standards. It was Reagan’s leadership on the Montreal Protocol that has prevented the release of more greenhouse gases than any other act by any other leader or government since. It was Reagan’s staff that devised cap and trade, and GHW Bush that signed it into law to curb acid rain.

    I’ll grant you that the GOP once was a party of grand ideas–today, it has become nothing but a party of grand opposition. As soon as the Dems agree that a GOP idea is good or has merit (cap and trade), the GOP masterminds run 180 degrees away from it. Why do they feel the need to do this, rather than pursue effective policy? My guess is that they’ve found it easier to win re-election if they just adopt the platforms of Fox News and talk radio entertainers.

    Sooner or later, some responsible Republican is going to step up to TR’s bully pulpit, and wave that big stick. Let’s hope sooner.

  • Stewardship

    otto- Obviously, you jest! Leadership is a bitch. When you control 2/3′s of the government, there is an expectation, if not obligation, to lead.

    • LFC

      Stew, learn why a 60/40 vote is currently required in the Senate to pass nearly anything. When a minority is allowed to block the majority, and that same minority feels that it is politically advantageous to prevent the majority from accomplishing anything (country be damned), you have our situation today. Repeat after me … tripled the use of the filibuster. Tripled. 3X. Repeat it again. After you’ve schooled yourself a bit, come back back to us about “control”.

  • LFC


    Sure, they stopped regulating coal mines for safety so more miners could die to bring us cheap coal. They created the Haliburton Rule so fracking for natural gas could be done with no EPA oversight, killing who knows how many people by contaminating their water and causing an increase in seismic activity. So we get more natural gas by ignoring the consequences to those who aren’t profiting from it. I’m sure if they thought they could get away with it, they’d have the nuke industry regulate itself too. After all, self regulation has worked out SO well every other time we’ve tried it.