Is the Federal Reserve Responsible for High Oil Prices?

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The Wall Street Journal seems to think so. Unfortunately, their argument has a dollar-sign-shaped hole in it. 

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Reuters

Finding novel ways to blame the Federal Reserve for America's economic woes has become a favorite parlor game on both the political left and right. And now that the rising price of oil is threatening to slow down or possibly derail the recovery, it was probably only a matter of time before someone tried to blame Ben Bernake & Co. for the cost of crude. Today, The Wall Street Journal's editorial board took a brief stab at it while they were busy lambasting President Obama's energy policies.

To its (limited) credit, the Journal does acknowledge that there might be a few other factors pushing up global crude prices, such as instability in the Middle East and rising demand in China and Brazil. But for various reasons, those can't possibly be the root of the problem, it argues. The more likely culprit, the paper says? U.S. monetary policy. 

Oil is traded in dollars, and its price therefore rises when the value of the dollar falls, all else being equal. The Federal Reserve throughout Mr. Obama's term has pursued the easiest monetary policy in modern times, expressly to revive the housing market. It has done so with the private support and urging of the White House and through Mr. Obama's appointees who are now a majority on the Fed's Board of Governors.

There is a certain surface level logic to the Journal's argument. If you look at the price of Brent crude over the past year or two -- which I've plotted in the graph below -- you'll notice that it began a relatively consistent rise around November of 2010, when the Fed tried to goose the economy by embarking on its second round of quantitative easing. QE2, as it's known, ended in June, but the fed has kept interest rates at rock bottom levels since. All that easy money, the Journal says, may be inflating the cost of oil and other commodities. 

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There's just one tiny little problem with this version of recent history: Since QE2 took place, the value of the dollar hasn't dropped. In fact, it's risen. Here's a graph of the U.S. dollar index, which tracks the value of the greenback against a basket of international currencies, dating back to November of 2010. Although it's value fell off midway through last year, the dollar has come back strong. It's now worth more than before QE2. And yet, oil prices are still spiraling upwards.

 

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There is one reasonable way to argue that the Fed has helped pump up oil prices, but it doesn't have much to do with the value of the dollar. Instead, it's all about bond yields. It's possible that, thanks to the super, super low interest rates on U.S. Treasuries, investors seeking  higher returns are pouring their money into commodities such as oil. Or, to put it another way, speculators might be driving up prices. 

It wouldn't be entirely surprising if that were happening. One of the explicit goals of QE2 was the push investors into assets other than Treasuries, and increase their value in the process. Unfortunately, we really don't have a perfect way of knowing when the price of oil is being driven by commercial demand, or by speculation. So if you're determined to blame the Fed for the price of gas, you might be able to do it. It'll just be hard to prove your theory. 

The Journal certainly didn't. 

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Jordan Weissmann is a senior associate editor at The Atlantic.

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