The Spike in Oil Prices on QE3 Expectations Should be a Warning to the Fed

EconMatters's picture


By EconMatters

Crude Oil prices for WTI were just $78 dollars in July, a month later they are $93.40 with supplies well above their five year average range, China decelerating at a rate not seen since the financial crisis, and US gasoline demand down 4.2 percent year-on-year and distillates down 2.8 percent.  


So what the heck is going on in the Oil Markets? Well, just look at the S&P for your answer: Capital has flowed into assets based upon the expectation that Bernanke and his cohorts at the Federal Reserve will print some more money out of thin air in the form of some monetary easing initiative falling under the heading of QE3. (See Chart Below)



Chart Source:, Aug. 11, 2012



Will the Fed ever learn that they cause more harm than good in the Global and Domestic economy with these QE initiatives that are the proverbial sugar rush to asset classes on one hand, but cause far more structural damage to the economic recovery by adding a huge federal tax premium to gasoline prices in the process.

This just is the same old cycle over and over:

  1. QE Program
  2. Gasoline prices explode upward with the rise in Oil
  3. Consumers pull back discretionary spending 
  4. Economic growth slows down 
  5. Oil drops because of slower economic growth 
  6. Politicians lecture about the need to create more jobs 
  7. The Fed notes slower economic growth 
  8. Consumers benefit from lower gas prices 
  9. Just as the economy starts to benefit from more discretionary capital being allocated towards the Retail & Consumer sectors and away from high input costs like Fuel 
  10. The Federal Reserve hints at QE3 and all asset prices inflate in less than a month with crude gaining $16 a barrel 
  11. Consumers and the economy start pulling back all over again.



Stop this endless cycle and let the economy slowly work its way out of thedeleveraging processin a natural, slow but solid growth trajectory which can actually build momentum upon each previous quarter instead of this push and pullback QE cyclicality that can never get out of its own way.


There are actually market reasons why prices should retreat in a slower growth economy, and this is part of the natural business cycle. But these QE initiatives never give the natural forces of lower input costs which given enough time to work their way through the supply chain can add a lot to stimulate creative and economic growth which is actually sustainable. And when the economy is really humming along market prices will increase just fine on their own accord. But artificially pumping the economy with steroids in the form of another QE3 Initiative is just self-defeating in the long run.


What are the actual benefits anyway? Bond rates have been extremely low; everybody who possibly qualified for a refinance has already done so at bottom basement rates. It doesn`t create any jobs which are based on demand. And oh by the way demand for more goods and services leads to more workers, but companies don`t need more workers if input costs are higher for consumers so they pull back discretionary spending in other areas to cover inflated gas prices that they cannot afford. 


The US was built on consuming, and I am afraid the only consumption that will be increased is capital allocated to gasoline purchases, and in case you haven`t noticed there are zero jobs created by higher gas prices in the actual grass roots of the economic growth engine in the consumer and services portion of the economy. 


Obviously, QEs in themselves do not work or we wouldn`t have to keep doing another iteration. Will there be a QE4,5,6,………………….100?  These are not UFC events, if you have to keep doing another QE Initiative that ought to tell policy makers that there is a problem here with their effectiveness in the first place.


The rise in Oil and Gas prices in the last month based on hopes that the Federal Reserve will boost asset prices some more should be the biggest warning sign that they need to stop this madness, and let the market down for a change. The goal is to improve the economic fundamentals, not push up assets artificially that create no actual jobs in the economy. 


The market has screamed loud and clear what the tangible results of the QE3 program are even without ever being implemented. Hello Fed I hope you are watching Oil prices lately because you caused more pain for consumers once again. Do you really need to go down this road again to know how it ends? QE3=Higher Gas Prices=Economic Slowdown.  Just say no to QE3!


Further Reading Forget QE3, America Needs a Real Road and Job Stimulus


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q99x2's picture

Alcohol is a Gas.

disabledvet's picture

this with all the other pieces both here and on the MSM all run from the same playbook: "'73-'74." this was the "age of the petro-dollar" when hundreds of billions of dollars...then even trillions...flowed out of the USA and "was in need of recycling"...right back to the USA as it turned out. "This time is different." 2008 was a dollar SHORTAGE...not a dollar glut. the folks...meaning the ENTIRETY of Wall Street...went long foreign currencies, "zero cost labor" and front run the Fed in Treasuries in order to be on the vanguard of "the next train wreck of USA inc." EPIC failure as Jamie Dimon...and Goldman Sachs...have now discovered. The USA is no longer recycling creating MASSIVE AMOUNTS of them through the Bakken shale...and soon the Northeastern shale deposits which are even larger. It is in the interest of the Fed to let those energy prices rise...and rise monetize these short "print taxpayers"...since in order to keep pace with the price increases labor rates will have to rise least those that can afford to do that. My personal view is that this epic drought has called the Obama Administration's bluff on there so called "energy policy." the Fed's job is to "let that thing go North"...either through another round of QE or ideally "something more organized"...cuz believe you're going to need the military to contain the blowback from this reset. that could be the Treasury Secretary if this doesn't go right.

Mr Lennon Hendrix's picture

Production levels in most Western States have dropped since 2009, and yes, production rates have everything to do with price, via supply:

dcb's picture

Yup, most people don't really get that berneke took what could have been a moderate recession and turned it into a financial crisis. with the flood of liquidity, oil rose to 147 and that was it. we were toast.


but the media of course say he is  a savior. this is  exactly what keeps happening. the economy starts to pick up some steam, and he kills it with qe, or course by the end of the qe, the damage has been done. It's real clear except that it's not about the economy, it's about making sure the value of bank assets stay over inflated so we can pretend they are solvent. it has also never been about the economy, but about trading profits.

orangegeek's picture

For QE = 1 to November 2012


Markets hold/rise.  Obama wins.  Consequence:  Oil keeps rising too.


Oil keeps rising.  Obama loses.  Consequence:  Markets hold/rise.





End loop.


Blue Dog's picture

The Fed is deliberately destroying the dollar. It's officially "buying" 61% of US debt but it's really much higher. It allows the big banks to borrow at close to 0. They buy treasuries and make money on the difference. The Fed creates the money that it lends to those banks so the amount in money being monetized is most likely at least 90%. Hyperinflation is coming very soon!

JohnKozac's picture

"It's painful but we've got to print. Sorry for the inconvenience. Feel free to be a Barbarian to hedge against the coming food price hikes."


marz929's picture

Your money isn't yours anyway. Once it leaves your possession it belongs to the brokerage house!

More from Ann Barnhardt who has been warning about this for months.

Do you remember how I told you about the Ponzi scheme that imploded in 2007 called "Sentinel Management Group" that stole over $500 million in customer funds? The NFA was the auditing regulator of Sentinel, and the NFA admitted after the Sentinel Ponzi imploded that they signed off on their audits even though the NFA claimed not fully understanding Sentinel's books or accounting methods. In other words, the NFA didn't really audit Sentinel at all - they just PRETENDED to audit them, drew up some forms, had some robosigners sign off, and then just hoped that when the shit hit the fan, everyone in the industry would be so terrified of the NFA that no one would hold the NFA accountable for their criminal malfeasance - or even talk about it.

Sentinel took customer segregated money and fraudulently used it as the collateral on a loan from Bank of New York Mellon for $312 million to fund their own in-house proprietary trading operations. When the Sentinel Ponzi collapsed, BNYM sued to go to the front of the line of creditors - ahead of the customers of Sentinel whose money was fraudulently used as collateral, which has now been "linguistically sanitized" into the word "hypothecated".

The federal appeals court ruled yesterday that not only does BNYM stay at the front of the line, but that using customer segregated funds as collateral is NOT a crime, and that co-mingling customer segregated funds with proprietary funds is NOT fraud.

Here is the Reuters piece.

Read this quote from the ruling, which is, in essence, the entire financial market paradigm being guillotined:


That Sentinel failed to keep client funds properly segregated is not, on its own, sufficient to rule as a matter of law that Sentinel acted ‘with actual intent to hinder, delay, or defraud' its customers.

U.S. Circuit Judge John D. Tinder

What this means is that even if Jon Corzine is somehow dragged into court by private citizens, because you know damn good and well that the Justice Department will never, ever touch him, Corzine now has a legal precedent, likely from a bribed or otherwise coerced Federal Appeals Court, explicitly stating that an FCM can use customer deposits to pay its debts, and that the customers themselves are subjugated and have basically no legal right to their own monies, no matter what the law says, or what legal assurances, claims or guarantees are made to that customer about their funds held with an FCM or any other brokerage or depository institution. The "secured" party at the front of the line will always be the mega-bank who made the fraudulent loan using the stolen customer funds as collateral.

In other words, all customer funds in the United States are now the legal property of JP Morgan, Goldman Sachs, BNYM, or whichever megabank is the counterparty on the loans the FCM or depository institution takes out in order to fund its mega-levered proprietary in-house trading desks.

For the love of God, I don't know what more there could possibly be to say to snap you people out of your normalcy bias trance. You have GOT to get ALL MONIES out of the financial system NOW. This ruling sets precedence for every depository institution, not just futures brokerages. It is now legal in the United States for any financial institution to steal customer funds, borrow money against those funds for the uber-levered proprietary trading use of the financial institution, and the customers have ZERO CLAIM TO THEIR OWN FUNDS once they are in the custody of the financial institution.

The court has ruled that once your money passes out of your PHYSICAL POSSESSION, and I mean PHYSICAL possession, it is no longer yours, and you have no legal claim or legal recourse to it when it is stolen. This includes BANK ACCOUNTS. Money in a bank is in the possession of the BANK, not you. Do you comprehend this? The entire system is utterly devoid of any integrity or genuine security and is breaking down catastophically before our very eyes. You HAVE to comprehend that your money sitting in an account is no longer legally yours. You have to force your brain to process and comprehend this, no matter how incomprehensible it may seem. IT IS OVER. This is Marxist hell. We have arrived.

This ruling and precedent will be used by every brokerage, every bank, every insurance company and every pension fund to deny you your money when the financial system finally collapses, be it on Monday, or be it two years from now.


You have GOT to GET OUT.

OldE_Ant's picture

I want to add to the above comment.   Having traded KCG (KNIGHT) for some profit I received an e-mail pointing me to the following:   

This document basically tells KCG longs that due to the emergency nature of the situation that KCG bypassed existing law, got the SEC to go along with a rules change and voila - longs are completely screwed out of any rights to vote down the 'deal' managment made.   The SEC is even complicit in helping KNIGHT out in the whole thing.  You want to screw your shareholders - sure - as long as you cover that $400M in trading costs.

Consider if KNIGHT didn't have squat for capital and went BK.  What do you think would have happened to all of the trades it did?  (i.e. the real stock, and money they supposively paid).   The money and stock associated with all of the trades would have be locked up in court for a few years while everyone tried to figure out what happened.   I think this was the sole reason NYSE backed out a certian number of trades (simply because KNIGHT could not have come up with ALL the money and would have went BK).

If KNIGHT went BK and a whole slew of transactions went into court land this would have caused major market havoc as people would then realize a simple fact.   There are certian players in the market who can not just create 'virtual shares - naked shorting' but can also create 'naked cash'.   KNIGHT did just that.   They had 3 days to fill this gaping hole or face a serious threat to the system, hence players came out of the woodwork to 'save KNIGHT'.  Actually they saved their own asses - probably because a lot of the trades KNIGHT executed were with those same players algos.

In short while you may think when you execute a trade that someone actually has stock or cash, (like buying a car) they don't.  They have NOTHING, zero, ZIP, NADA and for 3 days you have zip, ZERO, NADA but HOPE.  What is worse is when push comes to shove according to the above court ruling anyone with money in these things will find they have nothing left, or it will be tied up in court until worthless.  

This means not that are markets are broken, they are fricking DANGEROUS and HAZARDOUS to your wealth.    I feel more confidant sitting down at a poker table in a casino than putting my money in a brokerage account, 401-K etc. these days.

End of Line

beachdude's picture

Dear econmatters,

1 : a condition in which the visual images come to a focus in front of the retina of the eye resulting especially in defective vision of distant objects
2 : a lack of foresight or discernment : a narrow view of something.

Trees, meet forest.

paulbain's picture

The last chart (in the article above) predicts that, as of late 2013 (about 14 months from now), gasoline's price will be only $3.25 per gallon. That is right, just $3.25 / gallon.

Folks, if you believe this prediction, then you are in for one helluva surpise in about a year's time. Even without QE3, gasoline's price shall be much higher than $3.25 in late 2013.

Don't believe me? OK. Then just wait a few more months. It shan't be long now.

-- Paul D. Bain


Landrew's picture

In this depression I don't think gasoline will be headed higher. Wages are falling so gasoline will fall at a slower rate. Gasoline could be 1.89$ and average wage of 3.00$. Price isn't what matters it's the purchasing power of your dollar. Just as with higher education, you can only charge what the market will bare, I think Adam Smith wrote an interesting book on the topic

The Wealth of Nations

deez nutz's picture

The market has screamed loud and clear what the tangible results of the QE3 program are even without ever being implemented:

                                   "FUCK YOU BERNANKE"

Dareconomics's picture

Mr. Durden is right about the endgame. The Fed will keep printing to suport the economy until there is a crash. I wrote about this two days ago in response to Art Cashin's remarks on CNBC. What else can they do? If they stop printing, the economy and the stock markets will tank, and it will be all their fault. Once intervention starts, it cannot stop.

LMAOLORI's picture



The Fed will print until we get rid of bernanke after that it depends on who replaces him.  For example Romney has said he will get rid of ben rumor is he will replace him with Alan Blinder who recently said...

How Bernanke Can Get Banks Lending Again


If the Fed reduces the reward for holding excess reserves, banks will have to find something else to do with their money, like making loans or putting it in the capital markets.


The Fed's hostility toward lowering the interest on excess reserves is almost self-contradictory. When Mr. Bernanke lists the weapons the Fed plans to use when the time comes to tighten monetary policy, he always gives raising the IOER a prominent role. His reasoning is straightforward and sound: If the Fed makes holding reserves more attractive, banks will hold more of them. Why doesn't the same reasoning apply in the other direction?

But suppose it doesn't work. Suppose the Fed cuts the IOER from 25 basis points to minus 25 basis points, and banks don't lend one penny more. In that case, the Fed stops paying banks almost $4 billion a year in interest and, instead, starts collecting roughly equal fees from banks. That would be almost an $8 billion swing from banks to taxpayers. There are worse things.

in full

JeffB's picture

The problem with that scenario as I see it is that the answer to our problem isn't really to goose the economy by getting the banks to lend more.

Our problem is in fact the opposite, the banks have already loaned too much. Artificially goosing the economy as the Fed has done leads to a misallocation of resources. It's not true savings of capital that is being invested... too much of it is fiat money printed out of thin air masquerading as saved and invested capital.

It's like a game of musical chairs no one realized they were in. There wasn't enough saved capital for all the people who were loaned money/let into the game. When the music stops and they realize it's not all there the panic and chaos starts.

The money supply has grown at a ridiculous rate already due to the de facto Fed monetization of our debt, but it would be far worse if the money they've pulled out of the economy and hence out of the money supply via the massive build up of excess reserves was let to flow back into the economy.

The money supply would shoot up like a rocket, particularly in our partial reserve system where the effect would be multiplied some 9 or 10 times as those banks loaned and reloaned that newly released money.

Inflation would rear its ugly head and bite us with a vengeance.


Quinvarius's picture

They are already doing QE.  They will continue to do QE until the banks can stand on their own--Which is never.  Only fools are waiting for the Fed to admit it or announce it.

max2205's picture

Fill up the guzzler on your credit card. Who gives a fuck who has to pay it off. Aint gonna happen

Flakmeister's picture

Well.... how else are you going to monetize the debt? The game must go on for TPTB....

It's a Catch-22.....

Now the real issue is that all the QE cannot be used to increase the supply of oil... From 1994-2004, 2.4 Trillion in CAPEX brought a ~12 mmbpd increase in C+C, from 2005-2010, 2.4 Trillion in CAPEX resulted in a decrease of 200,000 bpd in C+C

You *really* can't print oil...

ihedgemyhedges's picture

This post is about as useful as the crap Phoenix puts out to drive readers to his site.................ZH readers already know this as TD does his job very think of another way to get some "unique" visitors to your site.........

michael_engineer's picture

Agreed. Any comments about slower growth or solid growth fly in the face of resource depletion structural constraints and contraction impetus.

Landrew's picture

Not true both are not mutually Exclusive. That is exactly how it all plays out. Production declines, prices rise, employment falls, prices fall, employment rises and finally production rises (less so depletion). As the economy falls further into depression there is less need for energy and production falls but prices remain higher. Does that not sound like exactly what is happening around the world? The easy oil is gone or why drill two miles deep in the ocean, dig tar out of the sand and boil it with fresh water? The decline extends the oil capacity thats how it's playing out right now. Sorry nope hopey change. Physics matters (yes the pun is intended:)