The Federal Reserve announced yesterday that it was going to pump $1.2 Trillion dollars into the economy by purchasing long-term Treasury Bonds and mortgage securities. Oil prices, which had been hovering around $40 per barrel after bounding off its December 19th low of $32.40, have now increased about 60% from that low and over 20% above the recent average. While many economists do not believe that this new higher price can be sustained in view of the recession induced lower demand, I do not agree.
The Fed’s purchase of bonds and securities represents $1.2 Trillion worth of new dollars into our economy. More dollars competing for the same number of goods is inflationary, as evidenced by the dollar falling yesterday and today against a slew of world currencies. This, coupled with OPEC’s lowered production rates, should keep oil above the $50 mark for quite some time. When our economy begins to recover, that increase in demand should push oil up even further. Since gasoline prices follow oil, but with some delay due to our overabundant supply, expect price averages around $2.50 per gallon in late Spring, with further price surges this Summer to $3.00 – $3.25 per gallon.
When that happens, I’m sure we will see Congress going nuts, and again dragging the oil executives before a committee demanding to know what they are doing about the rising prices in the face of a still weak economy. Calls will emanate to tax their “windfall profits,” and this time they just might succeed. If they do, you can bet the farm that gas will once again hit $4.00 per gallon. Of course, if Obama is able to enact Cap-and-Trade, all energy prices should increase by a minimum of 35% after it takes effect.
No crystal ball, just basic economics. It is just a shame that no one in Congress paid attention in class.