High Crude Oil Prices? It's the Fed, Stupid
06/27/08 - 12:10 PM EDT
Nat Worden
By keeping interest rates low, the Fed is raising the supply of dollars and other forms of liquidity in the financial system, thus weakening the value of the U.S. currency. But the lack of scrutiny of the central bank in the current oil debate is curious.
"We suspect that at least some of the liquidity being pumped into the system by the Fed is going into the oil market," says RGE Monitor analyst Rachel Ziemba. "There are global supply-and-demand forces driving oil prices on a long-term basis, but in the short-term, the Fed's actions must be lending momentum to the market." A spokeswoman for the Fed declined to comment. It's difficult to figure out exactly how the Fed's manipulation of the money supply is affecting the energy markets. The Fed reports that its broadest measure of the money supply, M2, increased by 6.3%, or $457 billion, over the last 12 months. While the Fed is expanding the monetary base in an attempt to stimulate the sluggish economy and cushion the financial system against the ravages of the credit crunch, some observers say it's driving speculation in the red-hot energy markets. Some lawmakers have pointed fingers at unnamed speculators for high prices, and big oil companies like Exxon Mobil(XOM Quote - Cramer on XOM - Stock Picks) and Chevron(CVX Quote - Cramer on CVX - Stock Picks) have pushed to loosen current restrictions on domestic oil drilling. The central bank is designed to be independent from the federal government in its decision-making, but Congress created the central bank and it does have oversight responsibilities for it. The Fed's decisions on interest rate policy are particularly sensitive during an election year. This time around, rate hikes would be viewed as a boost for Democrats, while further rate cuts would favor the incumbent Republicans in the fight for the White House.
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