Federal Reserve Chairman Ben Bernanke did not introduce a
third round of quantitative easing (QE3) in his speech at Jackson
Hole on Friday. But he did put forth the framework for what
one analyst termed "QE forever" -- which could lead to permanently
high oil prices.
[caption id="attachment_72378" align="alignright" width="300"
caption="Jeddah seaport, Saudi Arabia"]
[/caption]
This entails the Federal Reserve having unlimited authority to
buy U.S. treasury bonds. This is a de facto admission that all
previous measures have failed -- the U.S. unemployment rate is
still rising, economic growth is unsustainably weak, and the
housing market has yet to bottom.
It also proves no other investors want to buy American treasury
bonds at such low interest rates. This is a very unstable
foundation for the U.S. dollar (
UUP
,
quote
). Combined with Saudi Arabia and other OPEC members' need to
maintain oil prices at around $100 a barrel, this could keep
petroleum prices permanently high.
Oil prices (
USO
,
quote
) soared as a result of the second round of quantitative easing
(QE2). The Federal Reserve inflated its balance sheet by $700
billion to buy U.S. treasury bonds from November 2010 to June 2010
to underwrite the American budget deficit and provide liquidity to
capital markets.
The creation of $700 billion in U.S. dollars with no economic
growth behind it was inflationary because the U.S. dollar fell;
basic supply and demand here, no surprise. As a result of the
dollar falling, oil and other commodities traded in U.S. dollars
rose. USO has risen in recent market action in expectations of more
quantitative easing.
Along with "QE forever", the Saudi oil minister stated in an
interview earlier this year in the
Financial Times
that oil prices needed to be maintained at
$100 a barrel to finance domestic spending
programs
to prevent an "Arab Spring" uprising in the Desert Kingdom. This is
also the case in a number of repressive, oil-rich Middle Eastern
states.
Nothing has replaced oil as the most economical basis for
transportation. Natural gas and coal have many uses, but not to
move a motor vehicle, train, boat or plane. Alternative energy has
proven to have limited utility thus far, even with all the high
hopes and high spending from public and private sectors. No matter
what the basic fundamental economic supply and demand for oil
prices, the cost could be kept at a high level
due to the political framework
of both major producers and users.
