Is oil demand self sustaining? The reason I ask that question is that oil prices breached $90 a barrel and it is the same question that Scott Pelley asked Fed Chairman Ben Bernanke about the economy in his “60 Minutes” interview on Sunday night. Mr. Bernanke's answer was quite compelling. Bernanke said that, "It may not be. It's very close to the border. It takes about two and a half percent growths just to keep unemployment stable. And that's about what we're getting. We're not very far from the level where the economy is not self-sustaining."
In Mr. Bernanke's mind, the economy of the world's largest energy consumer still needs the Fed to keep it moving along. In other words, the only reason why Mr. Bernanke thinks the economy is showing any growth at all is the massive Quantitative Easing (don't call it money printing for heaven's sake) and it may be the only reason we have seen energy prices rise.
Oil broke $90 on reports that the Irish emergency budget will pass. Oh joy! Oil has rallied on every government bailout and every time we seem to plug a leak in the European economy. Now with Ben Bernanke open to a bout of QE3 and the possibility that the U.S. and the International Monetary Fund will back the EU, it seems the dollar will bear the brunt of the latest market bailout. A weak dollar and strong manufacturing demand across the globe leaves oil bulls little to fear until the next European crisis or until China decides to put the break on inflation.
With the Euro rising and the dollar falling, this should heighten inflation pressures in China. With China controlling their currency and the US bailing out the universe, the shift away from the dollar should fuel inflationary pressures in China. Dow Jones reported today that an economist at China's key government think tank, the Chinese Academy of Social Sciences, on Tuesday suggested China raise its consumer price inflation target to 4% next year from its 3% target for 2010. A higher CPI target could help ease yuan appreciation pressures, reduce overly ample liquidity and allow price reforms of energy products, Wang Tongsan, director of the academy's Institute of Quantitative and Technical Economics, said on state radio. The academy said it expects China's CPI to rise 3.2% in 2010, higher than the government's target of 3%, according to the radio broadcast.
The think tank also urged China to switch to an investigative unemployment rate next year, which will likely be below 5.2%, the report said, adding the current registered unemployment rate will likely be below 4.2%. The registered unemployment rate is usually lower because it doesn't include unemployed migrant workers, who form a large part of China's workforce.
So with the market getting bail out after bailout and the dollar back to losing value, the oil bulls have the upper hand. It does not hurt that the Bush Tax cuts were extended.
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at firstname.lastname@example.org.