Tags: Schork | Fed | oil | prices

Schork: Don't Like High Oil Prices? Blame the Fed, Not OPEC

Sunday, 10 Feb 2013 10:08 AM

By Kathleen Walter and Dan Weil

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The Federal Reserve's ultra-loose monetary policies – not international tensions or supply factors – are a prime reason for high oil prices, says Stephen Schork, editor of The Schork Report, a subscription service providing technical and fundamental daily views of the energy cash and derivatives markets.

"Right now, the biggest driver of oil prices, or the biggest supporter of ‘high oil prices,’ is not OPEC but it’s really the Federal Reserve, with their policy of really keeping the value or the cost of money artificially low; and that is keeping the dollar artificially cheap," Schork tells Moneynews TV in an exclusive interview.

"There is a historic inverse relationship between oil prices and the value of the U.S. dollar because oil prices are valued in the U.S. dollar," Schork says. "So by keeping the dollar cheap relative to other currencies, you’re certainly giving a driver, a support mechanism for higher oil prices. That makes oil, which is priced in dollars, cheaper in foreign currencies."

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Schork says the problem is nothing new: “I’ve maintained over the past six, seven years in this ‘high oil environment’ that the best thing the U.S. government could do to help ease the pain was to pursue a policy to strengthen the dollar.”

Schork sees oil prices between $85 and $95 a barrel this year. On the New York Mercantile Exchange Friday, crude oil for March delivery slipped 11 cents to settle at $95.72 a barrel.

"That is indeed a comfortable level in an economy here in the United States that is growing,” Schork says. "But that brings us to the important question: Can the consumer afford these prices, given where they stand right now from a macro-economic standpoint?"

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One way to reduce high U.S. energy prices and market volatility, Schork says, would be if President Barack Obama approves the extension of the Keystone pipeline, which would enable the transport of cheap crude produced in North Dakota, Montana, and Canada.

The pipeline now runs from Canada to the Midwest. An extension could bring it as far south as the Texas Gulf Coast.

Completion of the Keystone extension, he says, would calm volatile and uneven gasoline prices significantly. “So instead of these spikes to $4.50 or $5 that we’ve been seeing in certain market areas, certainly out on the West Coast, increased access to this oil will help soothe that, and we wouldn’t see these huge disparities in regional gasoline pricing,” Schork says.

“Approval of Keystone . . . would indeed take a lot of volatility out of the market, and we wouldn’t see these wild swings in the years ahead," Schork says.

In terms of gasoline prices, “$3.50 right now is probably a fair market value or fair value for the consumer in the years ahead,” he says. Gasoline prices currently average $3.55 a gallon nationally.

Drivers should realize that they don’t have a bad deal on gas prices in inflation-adjusted terms, Schork says. “The consumer has to appreciate that given normal inflation, $3.30, $3.50, that’s no more than what we were paying 30 years ago for our gasoline.”

The problem is that over the past 30 years, as gasoline costs have fallen to a lower portion of families’ budgets, people have shifted spending to other areas. “So what we’re going to have to do in the years ahead is realign our spending habits,” Schork says.

The recent spike in gasoline prices is seasonal, Schork says. Refineries typically shut down for maintenance this time of year.

“What is disconcerting right now is the larger variance in the price rise this season,” Schork says. “This is a function of extended refinery outages. Over the years we’ve seen a significant downgrade in the amount of refinery capacity here in the United States.”

That’s because the economics don’t work for refinery owners, he says.

Declassified: ‘Financial War’ Could Wipe Out 50% of Your Wealth’

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