Recent Bernanke Speech may Keep Currently High Oil Prices Permanent

Chairman Ben Bernanke of the Federal Reserve did not launch a third set of quantitative stimulus during a recent speech given to colleagues and journalists at Jackson Hole, Wyoming. However, he did present the background for so-called “QE forever,” which can make the high current oil prices permanent.

“QE forever” means the Fed will retain limitless authority to purchase U.S. debt. It is actually an admission that past measures were not successful. Proof of this includes the continuously increasing unemployment rate in the United States, the unsustainably weak growth of the economy and the bottoming out of the housing industry.

It is also proof that there are too few investors willing to purchase U.S. treasuries at their currently low rates of interest. This is a bad sign about the future prospect for the dollar and, with the addition of the need for Saudi Arabia and OPEC members to keep the oil price per barrel at almost $100, prices for petroleum may stay high permanently.

The sharp rise in the oil price per barrel was greatly helped by QE2. The Fed grew its holdings by almost $700 billion as it purchased American treasury bonds to support the budget deficit of the United States and make capital markets more liquid.

The printing of $700 billion American dollars without any economic growth to back it up was inflationary since the American currency dropped. Due to the fall, oil, being traded in American dollars, moved up. Oil has risen yet again in latest trading due to anticipation of additional quantitative relief.

Together with “QE forever,” the oil minister of Saudi said in a Financial Times interview in the early parts of this year that the crude price per barrel has to stay at $100 to pay for domestic programs in order to prevent an uprising in Saudi Arabia. The same case holds true in several repressive, oil-rich states in the Middle East.

There has not been a replacement for oil as the single most energy-rich resource necessary to our global transportation economy. To be fair, coal and natural gas have plenty of uses. However, they cannot move a train, motor vehicle, plane or boat. So far, alternative fuel has shown to have limited use despite the high spending from private and public sectors on its development. Whatever the basic supply-demand fundamental for the crude price per barrel, the cost can stay at a high rate because of the political reality of both users and producers.