The Fed and nonoil companies have been pushing a highly controversial plan for the past several years to have the government purchase oil leases on an open market, and the process of doing that started this week.

Last week Brent crude prices briefly breached their all-time high as well, reaching $69.06 a barrel, before briefly retreating. As discussed in the article below, we are not concerned about how global supply and demand may affect the price of oil and we will not do any type of analysis on this topic until we hear fromNGL companies such as AGL about actual performance on the global oil market.

An oil refinery. An oil refinery. Photo Credit: K.D. Srinivasan, Reuters The U.S. Federal Reserve, whose interest rate hikes do not appear to be likely, is, at the very least, having a difficult time trying to balance its objectives of maintaining short-term borrowing costs and increasing inflation. This is a problem. Because a rise in the price of crude oil leads to lower prices for gasoline, it raises expectations of price increases even as they decline. At the same time, a fall in prices reduces demand for other goods and services, which further reduces real economic activity. The Fed has been reluctant to raise interest rates because it believes market expectations–or “forward guidance,” in Fed lingo–for the rate increase are too short term. The market seems to be anticipating a 10-8% rate hike sometime this year, which is considerably less than half of the rate hikes that Fed officials forecast in the spring of 2013, even though the economy was already in an impressive state of expansion. One thing that has caused Fed officials much consternation is the fact that the price of oil has dropped to a 30-year-low, from more than $108 a barrel in the middle of summer. The drop in the price of oil has exacerbated the U.S. problem. We have already been observing this effect since 2009, but did not take it to the market in large because it did not seem to matter to a large segment of our economy. At this point the problem may become increasingly difficult to solve. The U.S. economy is not dependent on oil sales–the U.S. runs a trade deficit with China of $400 billion annually. And while it is true that U.S. imports have declined significantly since peaking in 2007, they increased significantly since 2010.Because of that the dollar’s strength has led to massive budget deficits and to rising debt levels that we have not seen for over three decades. At the same time U.S. oil industry employment has fallen nearly 15% from 2010 to 2012, and unemployment remains above 6%.

A rendering of a crude oil barrel.A rendering of a crude oil barrel. Photo Credit: R. M. Brown,United States Energy Information Administration,January 25, 2013 Although we’ve long said that the U.S. government is better off with fewer workers in the oil industry, our current administration has decided to take an even stronger role in keeping oil industry jobs. The U.S. government’s budget is about $2.1 trillion for 2013 and its share of the U.S. oil industry is about 2.9%. This creates a situation where the government has a larger budgetary burden on the sector than we normally experience with oil producers. And the more the U.S. government promotes the U.S. oil industry, the more pressure there will be for the sector to improve performance. It appears that the Fed’s focus on inflation and future economic growth is causing this to happen. An important part of the Fed’s plan for “increasing economic activity in oil and gas exploration, production, and transportation” is to “increase production capacity.” That means increasing drilling and production rates, as well as increasing the size of well pads and onshore production rigs. The Fed and non-oil companies have been pushing a highly controversial plan for the past several years to have the government purchase oil leases on an open market, and the process of doing that started this week. After an intensive three-day conference chaired by Chairman Ben Bernanke, the Department of the Interior announced last Friday that the U.S. Department of the Interior issued a solicitation to purchase over 13.7 million acres of oil and gas exploration and production rights across the country, according to a news release .

A block of oil on a mountain, Photo Credit: Daniel Nocera, The New York Times. A block of oil on a mountain. Photo Credit: Daniel Nocera,The New York Times. A block of oil on a mountain. Photo Credit: Daniel Nocera,The New York Times.

A block of oil on a mountain Photo Credit: Daniel Nocera,The New York Times A block of oil on a mountain Photo Credit: Daniel Nocera,The New York Times.

A block of oil on a mountain Photo Credit: Daniel Nocera,The New York Times A block of oil on a mountain Photo Credit: Daniel Nocera,The New York Times.

Among the main findings of this study are the following The primary endpoint is a reduction in the severity of cognitive decline after 4 and 6 months of treatment. Our best advice is to ask that the patient not come into the hospital and to stay in the home, said Dr. John L. Stuebing III, the chief medical officer at Health Resources and Services Administration.
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