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Tipping point for oil seen at $150 per barrel

Banker would urge Fed to act

- The Washington Times - Monday, March 7, 2011

A top Federal Reserve official on Monday said the central bank should react if oil prices soar as high as $150 a barrel because prices that high could throw the economy back into recession.

Meanwhile, the White House is considering releasing oil from the Strategic Petroleum Reserve to curb the rapid rise in prices since unrest broke out in the Middle East last month. Within weeks, the price of premium crude has jumped from near $90 to more than $106 per barrel in New York trading Monday.

Although both moves are aimed at easing public consternation over the run-up of prices at the pump to more than $3.50 a gallon on average for regular gasoline, they also likely would rile conservatives in Congress.

The strategic reserve has been tapped only during emergencies, such as the Persian Gulf War, while critics say further easing by the Fed would only stoke oil-fed inflation while doing little to help the economy.

Divisions have emerged on the Federal Reserve Board over what to do, but many members appear to side with Chairman Ben S. Bernanke, who hinted in testimony last week that the central bank might react if oil prices go too high.

Dennis P. Lockhart, president of the Federal Reserve Bank of Atlanta, for the first time Monday spelled out what level of oil prices might trigger Fed action, pinpointing the record level around $150 set in 2008. Many economists say those oil prices, along with $4-per-gallon gas, helped throw the economy into a recession.

"I think at the $120 range — it's a manageable level," Mr. Lockhart told the National Association of Business Economists.

"Around $150 it becomes a much more serious concern," he said. "If it plays through to the broad economy in a way that portends a recession, I would take a position we would respond with more accommodation."

Despite widespread worries that the Fed could stoke inflation by accommodating high oil prices, Mr. Lockhart said inflation is not a problem, especially because wage gains — the biggest cost for most businesses — remain anemic.

That means there's little risk of a spiral of higher wages chasing prices higher to double-digit levels as occurred after an oil-price spike in the 1970s.

Not all Fed officials agree with that point.

Richard W. Fisher, president of the Federal Reserve Bank of Dallas, on Monday said he worries that the Fed's loose money policies will set inflation loose and prove counterproductive.

He might oppose any further easing by the Fed through its program of purchasing U.S. Treasury debt to try to lower long-term interest rates.

Conservatives in Congress have rallied around inflation hawks such as Mr. Fisher, who is a voting member of the Fed's 12-member rate-setting committee this year, while Mr. Lockhart is not.

But Mr. Lockhart's more dovish statement on oil prices closely tracks what many private analysts say: The economy can withstand higher prices up to a point. But any move by oil over $150 per barrel and gas prices more than $4 per gallon could pose a crushing blow to strapped consumers and the economy overall.

White House Chief of Staff Bill Daley said Sunday that the recovery is strong but the surging price of oil "can have a serious impact on it" and cause pain for consumers.

That is why the administration is considering whether it should release oil from the strategic reserve to ease prices, he told NBC's "Meet the Press." But he added that such a maneuver is used only "on rare occasions" and factors other than price must be satisfied for the president to invoke that authority.

He blamed the price spike on uncertainty about how the unrest will play out in the Middle East and whether it will cause production halts in top oil exporters besides Libya.

Ned Brines, a stock-market commentator who lives in California, said he is alarmed like everyone else about the rapid escalation of fuel prices.

"Holy cow! I paid $4.09 a gallon on Thursday, and I drove by the same station this morning and the price had jumped to $4.29," he said. "I may start biking again."

But he said he doubts releasing oil from the strategic reserve will help much, given that the country already has record inventories of oil on hand at refineries and oil hubs, and that has not prevented oil prices from marching upward.

David Malpass, president of Encima Global and a former Reagan administration Treasury official, said he agrees with critics on Capitol Hill that the Fed is going too far to try to shield the economy against every adverse development at the risk of triggering inflation.

"The Fed keeps pushing more money in. They are buying the national debt every day," he said. "It sets a bad precedent in which people will expect the Fed to buy assets whenever the economy slows down.

"Three years from now, we wont like the results," he added.

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