Oil's Largest One-Day Gain On Record: Thank You, Mr. Bernanke

Yesterday oil had its largest one-day gain on record. The oil contract was up a total of $6.08 per barrel including after-hours trading to $128.56 per barrel -- the day before Ben S. Bernanke spoke at his Harvard alma mater to graduating seniors.

Incredibly, seemingly oblivious to homes freezing in Maine and Dakota winters, truckers losing their rigs, airlines cutting their workforces by the thousands and severely cutting back their service, family budgets being ripped apart by the price of gas, small businesses
unable to meet their payrolls, from his aerie at the Federal Reserve, not long from his years in academe, Mr. Bernanke sought to instruct us along with his Harvard graduating class audience.

As if out of touch with the realities of peoples everyday lives, Bernanke dismissed the idea that rising oil prices pose the same kind of threat to the economy today than the wage-price spiral of the 1970s. There, feel better now? To carry his looney tunes reasoning one step further he underlined his thesis that though inflation is higher today than he would like he philosophized all's good in the world because we do not now have "long lines at gasoline stations."

By Mr, Bernanke's standards that makes it OK for the oil industry, producers both here and abroad, to transfer literally trillions from the pockets of consumers here and throughout the world into their coffers, in effect, giving official sanction and blessing to the rapacious rise in the price of oil and energy. In effect, removing any moral suasion to either restrain prices, oil company profits, have OPEC increase production to pressure prices down, or to effectively use the bully pulpit of government to restrain consumption.

Knowing how Mr. Bernanke feels, the market took flight and the result was the largest one-day jump in oil prices ever. Yes, one can cite ancillary reasons but basically Bernanke signaled to the markets and the world at large that high prices were not an issue for this government nor would they be as oil prices moved higher still.

In July, 2007 this writer posted, "Federal Reserve Chairman Bernanke Shills For The Oil Industry." Given Mr. Bernanke's oratory at Harvard, it is more pertinent today than when it was written. And please don't be shocked at the price of oil cited at the time. I am taking the liberty of repeating it below:

Federal Reserve Chairman Bernanke Shills For The Oil Industry

Posted July 20, 2007

That the administration takes its lead from the oil barons is nothing new. That too many in our Congress are at the beck and call of the oil industry's "K Street" lobbyists is a sad given. But now we have an example of the oil industry's oozing influence engulfing the one office of government that has always embodied impartiality and integrity.

A question was raised by Sen. Robert Menendez (D. NJ.) during Federal Reserve Chairman's Ben Bernanke's testimony before Congress over the past two days. Sen. Menendez asked a somewhat rhetorical question, "Who is this economy working for?" A question that took Mr. Bernanke by surprise. The question itself was not answered directly but let me give it a try.

Given Mr. Bernanke's prepared statements and responses to questions during the course of the hearings, one might rightfully conclude that the answer to "Who is the economy working for?" is, according to Mr. Bernanke, the oil industry and those who share its interests both here and abroad.

In general summary, Mr. Bernanke's emphasis in his prepared statements and subsequent comments, was that the Federal Reserves' focus is on "core inflation levels". That is to say inflation excluding food and energy. Mr. Bernanke volunteered that "core inflation" was a better indicator of inflation trends. That he expected energy inflation to flatten out and not to have much impact on the inflation scenario in the months, possibly years ahead.
After those comments they must have been popping champagne corks at Oil Headquarters Central, not only here but in Riyadh and Moscow. Earlier last week, on CNBC, Mr. T. Boone Pickens, the oil industry's bad news ambassador to the public at large said, on good authority no doubt, the Saudis and the Russians want ever higher prices and will push them ever higher, until there is some forceful push back or the world finds itself at the edge of economic crisis. He continued that he expects prices to reach well into the $80/bbl by the time he hits 80 early next year.

Mr. Bernanke made no mention of the fact that oil prices, the single most important factor of the energy equation, have increased by 50% since President Bush's State of the Union Address in January. How incredibly convenient to oil interests that a senior and otherwise respected government functionary would be running interference for them, dismissing the significance of grievous energy inflation, and even more ominously giving credence and validation to current price levels. Never mentioning that these price levels were arrived at in large measure as result of cartel manipulation.

Here we have an example of our oil influenced government, forgoing its responsibility to examine and to instruct the public on how oil prices evolve. Instead the Federal Reserve extends cover to a large and manipulated segment of our economy, designating this gorilla on the inflation horizon as a lesser indicator than say, the cost of shirts and ties. After all, as Bernanke instructed the National Bureau of Economic Research earlier this month, "Inflation is less responsive than it used to be to changes in oil prices ... ". Translation: OPEC and your brothers in the oil patch, just continue what you're doing-we'll cover for you.

If inflation has been held at reasonable levels it is because of the growing and extraordinary productivity of both labor and technology, whose efficiencies have protected us from the limitless gluttony of the oil industry. The cover-up exhibited by Mr. Bernanke's shameful performance (also see post "Bernanke, Chairman of the "Oil" Reserve, Carrying Water for OPEC" 6/16/06) targets the very heart of the Federal Reserve's integrity.

Comments

[rugbyliz]

Mr. Learsy, you are blaming the wrong regulator.
Oil reached a record for one reason and one reason only: ECB President Jean-Claude Trichet indicated he was ready to raise rates next month.
That comment sent the dollar tumbling and oil higher. End of discussion.
In fact, Bernanke and his cohorts at the Fed did more to bring oil down over the past couple of weeks than the oil companies and the Bush administration combined when they indicated that interest-rate cuts are over. That put a floor under the dollar (until Trichet opened his mouth), because it started on the road to making yields on dollar-denominated investments competitive with those denominated in euros. The speculators piled into the buy euros/sell dollars and buy oil/sell dollars trades.
Why step in front of a moving train when there's nobody to put the brakes on? Oil also rallied as those who had bet on a decline had to capitulate and buy back their shorts.
The inverse relationship between the dollar and oil has been documented for ages.
Bernanke and the Fed don't set dollar policy. In fact, Bernanke last week made the first dollar-defense comments by a Fed Chairman in years. After those comments, the dollar rallied and oil fell.
If you want to blame someone, blame Treasury Secretary Hank Paulson, he is in charge of dollar policy.

[1rewd1]

You buy a commodity, you should have to take delivery of it.

"Theoretical" oil purchases should be banned, as should any commodity buy based on anything less than real purchase.

The big investment banks are driving this noxious run up, time to shut them down.

Ya ain't gonna see that happening any time soon though ....

[KillTheMessenger]

These purchases are not "theoretical". You have to pay up at the expiration date of the contract. If the price is right, you win big. If the price isn't, you lose even bigger.

[argeec]

If the world were truly just, Phil Gramm would be forced to scrub toilets and subsist on gruel for the rest of his natural life.

[jdacal]

If it smells, tastes, and feels like a pile of manure. Well.. it is manure!

This artificial crisis cropped up 7 years ago as soon as the Bush admin had their secret energy meeting. Yes... the contents of which they have refused to share with the senate and congress due to "executive privilege".

By pure coincidence (of course) gas prices stabilized about six months prior to the last election cycle. Soon after prices started to increase again. Must have been supply and demand -- we all stopped driving waiting to see if our candidate was going to win!

In January, after we have a new Democratic administration - and only AFTER that happens - will we begin to see a drop back down to the below $40 dollars per barrel price that we had prior to the "artificial crisis" we are now experiencing.

Put whatever "spin" you want on it. After all, we are currently in a spin and marketing cycle - nothing else matters, not even the truth.

Remember that economics is NOT some kind of force of nature, or controlled by some god. It is a man-made concept, created and controlled by man every step of the way. It is not a science but something to be manipulated and skewed to the will of those who may happen to be in power at any current moment. The good thing is that YOU control who is in power. Your future is in YOUR hands.

[Oldbuck]

tHIS IS WELL WRITTEN AND THE WAY IT IS BELIEVE HIM. HE IS RIGHT ON,

[seawolf77]

While Memorial Day was Peak Oil's coming out party, the China Olympics and a Gulf hurricane will put the exclamation point on it. That is why speculators are rushing in. They see the big pop coming. Then the big poop. Speculators do not create a trend, they amplify it. Think of speculators like a flea on a dog. The dog is walking happily along, tail wagging, head up, eyes bright. Then in an instant he is brought to his knees, and starts scratching violently. You would think that flea was huge, with the jaws and teeth of a piranha. But he's not, he's just a little flea, maybe the size of a tiny buggar. But he brought a 150 lb dog to a dead stop, and that dog gave him his full , undivivded attention. That is a speculator. We are the canaries in the coal mine, so thank us don't condemn us.

[victorberry]

Bernanke said what?

"... he [Bernanke] philosophized all's good in the world because we do not now have 'long lines at gasoline stations.'"

Does Bernanke actually think "short lines at gasoline stations" is a better situation? That's worse because either gasoline is too expensive for people to buy or people have no where to go (as in a job or a shopping trip).

Finally, we the people are now sacrificing for the war on Iraq and the imminent war on Iran. And it's a lot worse than giving up golf like Bush claims he did.

[texastornado]

Texas Oil Barons:
Yhaaaaaaaaahhoooooooo!!!! God bless George Dubya and God Bless Amerka.

[robinhood2]

What would you have Mr. Bernanke do? Raise interest rates? That would probably strengthen the $US and lower the price of imported oil somewhat but it might also send the economy into a deep recession. I remember when the unemployment rate was around 11% in California around 1982. It was great if you were a saver. You could lock in 15% on 30 year US government bonds. But it was bad if you were one of the 11% out of work. Let's hope the Fed knows what it is doing. But it is not the Fed's job to get people to be more thrifty in their energy usage.

[KillTheMessenger]

Germany's unemployment rate just went below 8% after 16 years of higher unemployment. The difference between US unemployed and Germany's unemployed is that Germany has a social net in place that will take care of housing, health insurance, education and a minimum supply of staples. It's not great to be unemployed but one can survive. It might be valuable to look into a combination of higher interest rate and better social security for the long term sake of the country. I know that is an "un-Amercian" concept, but it could make all the difference in the world.

[seawolf77]

KTM is right. When the Soviet Union collapsed, the social compact that existed between it's citizens and it's govrnment prevented a humanitarian disaster. Socialism I know. But what happens when capitalism fails? In Moscow a housing project that supports 10,000 people is not uncommon. We have 5,000 McMansions with 2 people in each. Get the picture.

[robinhood2]

Germany's national sales tax rate is around 19%, gas prices are much higher and I think personal income tax rates are higher as well. Americans are only in favor of higher taxes when someone else is paying. Even Obama's proposed tax increases would, in theory, not apply to around the bottom 95% of the population.

[JackHeismann]

So now it's Bernanke? That's mindless.

We still want a scapegoat for our 4 dollar gallon of gas. But until we get our heads out of the blame game, we're not going achieve a thing.

So who is to blame? Let's start off with the world. It's not just population growth, it's global industrialization on a massive scale.

Who it to blame? We are. With our gas guzzling SUV's, pickups, mini-vans, and super horsepower cars. Thermostats set at 72 degrees in winter. Daily trips to the store to get "fresh" food.

It's the Democrats, who block every single attempt to access the billions upon billions of barrels of oil sitting off shore and in Alaska. So not only do we have to pay OPEC prices, but we've helped create this global shortage. No wonder the speculators are speculating.

It's the environmentalists making it nearly impossible build new refineries in the US. Big oil finally gave up, moving to Saudi Arabia. But those refineries won't be on line for 5 more years.

It's the collection of fools who come up with half baked ideas like ethanol, then spend our time, energy (literally), money and national will creating a worthless solution and despoiling our environment.

There are real problems at the root of today's high oil prices. But fixing those problems will mean compromise, willingness to shed our biases, and personal sacrifices. Or we can choose to pay and pay.

It's our choice. Be sure to choose wisely.

Jack Heismann

[KillTheMessenger]

I liked your post until I read about your ranting about Democrats not wanting to destroy Alaska for the gain of a few oil companies. The total amount of oil up there is tiny. It would not give the world more than a few months of oil supply. Of course, it would mean hundreds of billions of dollars to oil companies. If you see that as a solution, go for it. You are also wrong about refineries. They are running at 85% right now and are woefully underutilized. Nobody would even think about building a new one. For what? There will be no more oil to process than what the ones we have can handle.

You are right, we have to chose wisely. But in that light you might want to think about some of your own suggestions.

[worldtraveller]

Jack,
One word.. Causation... Look at a graph of Oil prices the first big spike was when Bernanke cut rates in July. The huge spike up began almost simultaneously to the day he bailed out Bear Stearns by destroying the Feds balance sheet and people like me decided to lose all confidence in the markets and find other homes for our cash. Particularly homes in commodities that are globally transferable.
Look!!! Its very telling. Economists suck at managing markets they live in a world of ceterus paribus and i have never seen such a world.

[Rockyman]

Since the consumer has few options to gas/diesel to fuel our transportation needs, we are at the mercy of the suppliers. Cartels produce much of it, and now investers inflate it's value as a vehicle for profits. And the inflation in value doesn't cause massive shifts in consumption because we are nearly forced to continue usage because WHAT options do most of us have? Consumption is down some 7% in the US and no relief occurs at the pumps. If a grain gets too pricey we can look at other grains. We have to eat but we CAN eat other foods. What options do we have to fuel our cars? We are addicts and have only one way to satisfy our cravings and the supplier and invester knows this. We MUST get investers out of the commodities markets NOW. Only those that use oil in their production needs should be allowed to buy it. Oil CANNOT be a manipulated and inflated commodity when the consumer has really NO alternative!

[KillTheMessenger]

True... so few options... Prius or Honda Civic Hybrid. Ah, what the heck... Prius it is.

:-)

[Rockyman]

Another option. Maybe the Chinese can send us the bikes that once were their main mode of transportation!

[mydogshakespeare]

When will transcripts of the secret 2001 Cheney/Big Oil national energy policy meetings be made public? They will end a lot of speculation (and maybe lead to a few indictments). Let's see how the sausage was made!

[JackMehoffer]

" My father rode a camel. I drive a car. My son flies
a jet-plane. His son will ride a camel. "

-Saudi proverb

[KillTheMessenger]

I don't think so. I think they will fly solar powered planes. Saudi Arabia has some of the best solar resources in the world. They can easily power all of Europe with a few percent of their land area.

[SolarPowerGuy]

That's a cool idea, but storing solar energy on the airplane itself would be a major challenge. It's difficult with automobiles, using the technology we have available today. And airplanes need to put out much more power than a car.

[Falconjim]

rkoen said: Washington should have forced the auto industry to strict mileage standards beginning in the '70s, the people of this country should have taken energy conservation seriously, i.e. no SUVs, energy efficient homes, alternative energy sources. - - -End Quote - - -

There were auto fleet standards in place under President Carter. It was under Reagan's administration that alternative energy research was stopped, solar tax credits cancelled, and the solar panels taken off the White House. Republican congress in the 90's gave away huge tax credits for anyone who bought a very heavy vehicle (Hummer, SUV, etc) for business uses - even if they didn't need a vehicle that size to do their work.

This country has been living in an enrgy fantasy for decades.

[hank48188]

Oil was very cheap in most of ther 80's and 90's, I think in 1998 oil was $12 a barrel on the spot market, they could hardly give it away. With prices so low it's hard to change anything. In most countries in Europe the tax on gas is higher than the gas itself, that is the only way you can change behavior. You don't see many huge trucks and cars there, they are much smaller. Most of the jump in the price of oil is the falling dollar, I think the price of a EURO is about $1.55, I can remember when it was about $.80. The reason for all this is the balance of payments, we buy too much stuff from other countries. Start spending your money in America, buy American products.

[Bladernr1001]

But the dems blocked buidling of new refineries, drilling on our own soil and nuclear. The world passed us by on this while we diddled.

[SolarPowerGuy]

Meanwhile: some of us bought smaller homes, closer to work, instead of ex-urban McMansions. We replaced our old, 37 MPG cars with 50 MPG hybrids, and installed solar electric systems on our homes. In a few years I expect to retrofit my Prius to a plug-in hybrid -- and then I will be driving on sunshine.

My family is not remotely wealthy. We just have different priorities than most of the rest of you. My brother and my parents spent a few thousand dollars each year amusing themselves, which I have not spent. Over ten years, that can really add up to a lot of environmental upgrades.

Make my priorities yours. And then, solving the energy problem won't require massive expansions of polluting technologies which we KNOW will harm us.

[SolarPowerGuy]

In addition to the oil barons' need to fleece our pockets, they have one other great need: get McCain elected.

Toward that end, I predict a significant drop in oil prices beginning in September. We'll look at $100/barrel as a "bargain," and say, "Gee, that wasn't so bad." Bush will say, "see, I jawboned the Saudis and got prices down." McCain will say, "I can do that too, that's what Republicans can do." McCain will pick up votes, maybe enough to win.

Whoever wins, oil prices will be up above $130 again a few weeks after Inauguration Day.

[leduck]

that's dea on accurate.

[SolarPowerGuy]

You're welcome.

[Suzie813]

That sounds like what happened before the 2006 elections. It didn't help them that much and I doubt many were fooled.

[SolarPowerGuy]

Yes, I remember it happening in 2006 and I predicted it back then, too.

How much did it help? That's hard to quantify. But we did get four more years of the son of a Bush, didn't we?

And all those SUV-driving folks are REALLY feeling the pinch now. I expect that a significant drop in oil prices would matter much more this year than it did four years ago.

[Bladernr1001]

You just countered Solar Guys's whole arguement here.

That does not even make sense. What the hell does getting McCain elected have to do with oil prices.

I guess when you do not not feel the need to base your opinions on any facts or data you can say any goofy thing you want.

[KillTheMessenger]

September? End of summer driving season? Big deal.

[coloradosiren]

It never fails to amaze me how the great poo-bahs continue to rationalize based on theory opposed to reality.

[kingcityguru]

It is all about supply and demand. Demand is increasing everyday with each new person born on the planet and each step that a person in China, India et al takes toward industrialization.

That said, the Democrats in Congress could drop the price of Oil $20 IN ONE DAY by passing legislation that 1) said that Alaska and the coasts are open from the drilling of domestic supply; and 2) that the US would take a policy in favor of electrical cars and to that end that US would be building 400 new nuclear reactors so that the US could match France's 80% of its electricity from CO2 and air pollution free nuclear energy. Do that, and Oil drops below $100 in a week.

[KillTheMessenger]

Wow... look at that vivid imagination. If any of this was just that simple. Oil will care nothing about us bringing down the price of electricity some twenty years from now.

[kingcityguru]

It is that simple.

Prices of commodities, like stocks, factor in the future. Do something to increase supply like more drilling or decrease demand like build more nuclear reactors to generate electricity and the price of oil will come down.

Right now the price of oil factors in the US not doing anything to increase its own supply or cut down on its demand coupled with rising demand from China and India. Throw in a fear of an attack on Iran and you have +$130 oil (not helped by a declining US dollar as this price works out to about US$85 in Canadian dollars of four years ago)