The Fed and the Price of Oil

Given the potential for financial losses triggered by oil’s price collapse to cascade into the financial sector at large, the Fed may well be forced to intervene either directly or indirectly.

An email dialog with correspondent Mark G. last month alerted me to the key role the Federal Reserve plays in the price of oil– either helping to maintain the current low prices (by enabling financing of new production) or pushing down supply and production (by making financing of new production more difficult).

Capital–cash or credit–is as important as the actual hydrocarbons in producing fuels and natural gas.Without fresh capital or financing, the oil/gas will remain in the ground.

The Fed flooded the global economy with credit borrowed in U.S. dollars during its quantitative easing programs. Need to borrow billions of dollars to finance new oil production? No problem when the Fed was emitting trillions of dollars into the global financial system.

Now that the Fed has ended its QE money-printing program, the dollars have dried up. The other source of dollars–U.S. trade deficit–has also contracted as the trade deficit has declined.

This decline in the availability of U.S. dollars has placed global borrowers with dollar-denominated debt in a vice as the scarcity of dollars meets the pressing need to refinance debt that’s coming due and needs to be rolled over.

Strong demand and reduced supply lead to much higher prices for dollars–which is exactly what the world is seeing.

Domestic oil producers have a source for financing: the Fed. As I have speculated before, the Fed may not be a passive observer of the domestic oil patch’s financial travails. Given the potential for financial losses triggered by oil’s price collapse to cascade into the financial sector at large, the Fed may well be forced to intervene either indirectly through proxies or directly.

As I explained in Will the Fed Intervene in the Oil Market? (December 23, 2014), the Fed has a variety of intervention options, from buying oil futures contracts to buying at-risk oil-based bonds to enabling proxies to roll over oil-based debt.

Compare the staggering cost to oil exporters in lost income to the modest cost of the Fed financing domestic oil-based debt. If the domestic oil industry needs $100 billion in debt to be buried in a balance sheet somewhere or rolled over, the Fed can arrange this size of financing without raising an eyebrow. Compared to a balance sheet of $4+ trillion and the Fed’s essentially unlimited credit spigot, what’s $100 billion more in aid to the domestic oil/gas industry?

The oil exporters who are losing tens of billions of dollars in cumulative revenue do not have any equivalent Sugar Daddy. Their declines in income will have to be matched by declines in spending, declines that will cascade through the oil exporters’ economies with devastating impact.

If you want to deploy the oil weapon, make sure you have a central bank that can intervene at will, in whatever size is necessary, to reduce the impact on your own economy, while maximizing the financial pain inflicted on the targets of the oil weapon.

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  • About That “Strong” Dollar 01/16/2015

    At the moment, the US dollar is choice. This isn’t necessarily a vote of confidence for the dollar. It’s more like a vote against all the others. If big institutional investors must choose between bankrupt America and bankrupt Europe, right now they choose America. But this is a decision that can and will be changed in an instant. Just look at the Swiss franc…

    All the girls look prettier at closing time!

  • 11 top economists agree: our world of debt is on the edge of collapse, January 17, 2015

    A collection of nearly one dozen of the world’s top economists and other geopolitical observers believe that the world is close to financial collapse, because so much of what passes for “the global economy” is built on false or otherwise conjured pretenses.

    As collected by Michael Snyder, founder of The Economic Collapse Blog, here are what 11 experts are saying about geopolitical conditions the world over:

  • Me Who

    1/12/15 PUBLIC INTEREST CENTER, (614) 644-2160 MEDIA CONTACT: Linda Fee Oros CITIZEN CONTACT: Mike Settles Ohio EPA Receives Application for a Discharge Permit from Ashtabula Energy, which is owned by Great Britain’s, Velocys.

    Ohio EPA will hold a public hearing in Ashtabula on Thurs., Jan. 22, 2015, regarding an application from Ashtabula Energy to discharge treated wastewater to Lake Erie. The public hearing is at 6 p.m. at Kent State University – Ashtabula Campus, Blue-Gold Room, 3300 Lake Road West, Ashtabula.

    Ashtabula Energy, State Route 531 in Ashtabula, seeks to build a new 200 million dollar industrial processing plant to convert natural gas to diesel fuel. If approved, the wastewater discharge permit would allow 1.625 million gallons of wastewater per day to be discharged into Lake Erie. The discharge water would consist of non-contact cooling water, water treatment plant residuals, sanitary wastewater and process waste streams. The process wastewaters would be sent through a treatment process prior to being discharged.

    The discharge is expected to have minimal impact on the water quality of the lake. The project will discharge less than 10 percent of what Lake Erie can safely accept. The approved discharge may result in a change from the current water quality condition of Lake Erie, but cannot violate Ohio’s water quality standards.

    In addition to oral comments provided at the meeting, Ohio EPA equally considers written comments. The public can submit comments through Jan. 29, 2015, regarding the application. Comments can be sent to or Ohio EPA, Division of Surface Water, Permits Processing Unit, P.O. Box 1049, Columbus, OH 43216-1049. Please include ID # 3IN00387 in all correspondence. Ohio EPA will consider the technical, economic, social and environmental aspects of the project before deciding to issue or deny the final permit.

    The application and related documents are available for review at Ohio EPA’s Division of Surface Water (50 W. Town St., Suite 700, Columbus) by first calling (614) 644-2001 or Ohio EPA’s Northeast District Office (2110 East Aurora Road, Twinsburg, OH, 44087) by first calling (330) 963-1200. Interested parties also may write to the Northeast District Office for more information.

    cybertigress: Just 3 percent of the world’s water exists as fresh water—2 percent is locked in the polar ice caps; less than 1 percent resides in freshwater lakes and streams. The Great Lakes are the largest freshwater system on Earth.

    Lake Erie is FRESH water, KEEP it CLEAN !! It’s a no brainier, except to the big oil and gas companies$$.