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Last week Austrian economist Robert Murphy testified before Congress on the Fed's role in raising gasoline prices. Here is part of what he had
to say:
After hitting record highs in the summer of 2008,
the price of crude oil crashed amidst
the financial crisis and slowdown in world economic growth. After hitting a low of $33.87 per
barrel on December 19, 2008, the benchmark price of a Cushing oil futures contract had risen to $96.91 by May 17, 2011. . .
There are two main routes through
which Fed policy could have influenced oil prices (quoted
in dollars). First, the Fed could have caused the dollar to depreciate
against other currencies. Second, the Fed could
have raised the price of oil relative to most other goods and services. In
the remainder of this written testimony, I will first lay out the extraordinary interventions of the Federal
Reserve in the wake of the financial
crisis, and then turn to each of the two possible connections to oil
prices.
The Extraordinary Interventions of the Federal Reserve
The Federal Reserve has engaged
in several extraordinary measures since 2007 to deal with the developing financial crisis. The Federal Reserve Bank of New York has compiled
a timeline of these specific interventions. In addition to cutting the federal funds target interest rate to virtually zero, the Fed has expanded its balance sheet by purchasing mortgage-related derivatives and Treasury debt. . . .
[F]rom the creation of the Fed in late 1913 up until September 2008, the monetary
base grew by a little
more than $932 billion. From
September 2008 until the present, the monetary base has grown by an additional $1,595 billion. The Federal Reserve has clearly embarked on unprecedented
injections of liquidity into
the financial system during
the last few years. .
.
Crude oil is traded on a world market. If the dollar falls against another currency, such as the euro, then either the euro-price of oil has to fall, or the dollar-price of oil has to rise, to eliminate arbitrage profits. From
its peak in March 2009,
the dollar
has fallen 17 percent against
other major currencies.
Therefore, holding everything
else constant, the dollar deprecation
alone from early 2009 can explain a 20.5 percent increase in oil prices (quoted in dollars).
[Emphasis added]
Put differently, the oil price quoted in (say) Japanese yen has not risen as much since early 2009 as it has in U.S. dollars. . .
In addition to causing oil
prices (quoted in
dollars) to rise because of
a weakening dollar, Federal
Reserve policy may also affect oil prices more directly to the extent that it
has caused investors to
shift some of their wealth into commodities
as an “inflation hedge.” For example, since September of 2008, gold and silver
prices have increased some 80 percent and 210 percent, respectively.
A certain segment of investors and the general public are very concerned about the future purchasing
power of the dollar, and have invested in the precious metals to protect themselves from potentially large future price inflation.
More generally, some investors may be turning to other commodities (including oil) thinking that they will provide
a relatively safe store
of value, in the event that
the dollar and other paper
currencies weaken in the
future. However, although
this theory has a surface
plausibility, in practice it
is difficult to distinguish it from an explanation that oil’s price rise is
due to “the fundamentals,” i.e. a genuine growth
in end-user demand for oil
relative to the increase in output. . .
Conclusion
If policymakers want to lower the price of gasoline for American consumers,
they have several
options. Most obvious, they
could reduce federal and state gasoline
taxes. They could also expedite the regulatory and permitting process for the development of
offshore and other domestic
oil resources. Finally, with respect to the Federal Reserve, to the extent that a tighter monetary policy would strengthen the dollar and
reduce investor concern about future price
inflation, we would see lower crude
oil prices and hence lower gasoline
prices. It is notoriously difficult though to estimate the
quantitative impacts of these policies,
because market prices are influenced by so many different
factors.
George F. Smith
Read his book : The
Flight of the Barbarous Relic
Visit his website
Read his blog
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