As Libya descends into civil war, gas prices across the nation continue to soar. Will gasoline sticker shock sink the U.S. economy? Federal Reserve Chairman Big Ben Bernanke is watching but so far he does not think so and while he says that the rise in gasoline prices in the United States is, "a problem for a lot of people," it doesn't yet pose a threat to either the recovery or inflation. He also say that the Federal Reserve is ready and willing to "respond as necessary" if rising prices for oil and other commodities seem to be triggering broad-based inflation. Still the Fed is watching and you should be too.
The Fed Chairman was trying to be optimistic by saying that, “The most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in U.S. consumer price inflation.” Still is that just wishful thinking? At one point Mr. Bernanke was welcoming higher gasoline prices because in his mind it was a sign that his policies were beginning to work. QE 2 and its predecessor was an all out assault on deflation. By printing money the Fed wanted to create inflation out of thin air and rising gas prices were a sign that it might work. Rising prices for gas were a reflection of a return of consumer confidence filling up their tank and driving back on the road of economic recovery. It also meant that his fear of a deflationary downward spiral would not happen. In fact, in what would be considered a significant victory, Mr. Bernanke declared that the downside risks to growth have declined and the risk of deflation was negligible. Yet the rise in oil price of course might foil his master plan. You see the Fed has a dual mandate to fight inflation and promote price stability, a job much more difficult with the lack of stability in the Middle East. If rising gas prices inflate inflationary expectations, the Fed would be forced to withdraw the stimulus that has kept the economy afloat. It could also harm the Fed’s desire to create jobs through easy money policies as rising costs for oil and diesel and extreme volatility may make it more difficult for businesses to hire.
Of course the Fed Chairman is trying to be optimistic about the current situation. The truth is he has no other choice which is a shame as recent economic data shows his polices are working. The ISM manufacturing number was overshadowed by the spreading problems in the Middle East and North Africa as wars and rumors of uprisings kept the market off balance. Oil showed unease with reports that the Saudi’s jailed a Shiite Cleric who dared suggest that Saudi Arabia should become a constitutional monarchy. There were also reports of Saudi tanks on their border with Bahrain which was later denied. There are armed clashes with demonstrators in Iran and reports that opposition leaders were jailed. Add to that concern about Yemen, Kuwait, Algeria and the list could go on and makes one realize that this is an event unlike any other we have ever seen in history.
This isn’t necessarily a bad thing. I agree with Defense Secretary Robert Gates who said as reported by Dow Jones that, "protests across the Arab world have dealt major setback to al Qaeda militants and Iran by endorsing democratic change. It basically gives the lie to al Qaeda's claim that the only way to get rid of authoritarian governments is through extremist violence." With a wave of unrest and protests toppling regimes in Egypt and Tunisia and prompting reforms elsewhere, Gates said grass-roots movements, "are an extraordinary setback for al Qaeda." The Pentagon chief, a former intelligence analyst and CIA director, said that the example of mostly peaceful uprisings posed a problem for Iran that might become more acute over time. "Because the contrast in the behavior of the militaries in Tunisia and in Egypt, and except for a brief period of violence -- in Bahrain, contrast vividly with the savage repression that the Iranians have undertaken against anybody who dares to demonstrate," Gates explained. Describing himself as, "an optimist about these changes," Gates said it could take months or years for the unrest to play out but "a process of change has begun" after decades of "frozen" political arrangements. If political change in the region occurs without violence and gives rise to democratic rule, it will be "a gain for everybody."” Agreed!
Americans dug their cars out of the snow and went to the service station to fill their tanks. Not only did the American Petroleum Institute report that gasoline inventories fell by 4.90 million barrels, the MasterCard Spending Pulse report showed that weekly gasoline demand rose 3.1% to 9.118 million barrels a day. This, according to MasterCard, was the highest level of demand since Christmas Eve which was probably the last time the cars were not buried in a snow bank. Still one would wonder if it is possible to maintain this type of demand as gas prices continue to surge higher.
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.