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Bernanke Warns of Oil's Wrath

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Federal Reserve Chairman Ben Bernanke confirmed yesterday what most of us already knew: Gas prices are rising. It isn't bad yet, but just wait.

"The most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in U.S. consumer price inflation," he said. "That said, sustained rises in the prices of oil and other commodities would represent a threat both to economic growth and to overall price stability."

It's easy to show how right he could be on that last part. Nationwide, gas prices are now $3.39 per gallon, up from $2.67 a year ago -- a difference of $0.72 a gallon. In 2010, we drove enough to consume 138 billion gallons of gasoline. So right there, you're talking a $100 billion tax on consumers that wasn't around last year.

That isn't trivial. For comparison, the one-year payroll tax holiday passed in December will cut tax bills by $120 billion this year. Gasoline's increase, in other words, has almost entirely smothered that boost. Gone. Thanks for playing. Most economists upped their estimate of 2011 GDP growth based on the benefit this tax cut would provide. Watch for some to revisit those estimates soon.

Here's another way to think about this stuff:

Source: Bureau of Economic Analysis, author's calculations.

The data for this chart only goes to January. The ratio is surely higher now, since oil has spiked in the past two weeks. But even before the recent spike, energy consumption as a percentage of consumer spending was above average and getting close to levels that previously became unsustainable and pushed the economy into trouble, if not recession.

The problem with spending more on energy is that so much of the benefit ends up abroad, in the pockets of oil-exporting nations. It's not like spending more on eating out, where local restaurants benefit. It's not like spending more on homes, where construction workers nationwide benefit. Higher oil prices help very few of us.

Shareholders of oil companies and oil energy trusts such as BP Prudhoe Bay Royalty Trust (NYSE: BPT  ) will be enriched with higher dividends. Workers at Tesla Motors (Nasdaq: TSLA  ) probably have more job security now. If you're a petroleum engineer, you're probably knee-deep in job offers. But for the other 99% of us, all we get from higher prices is gas-pump misery.

What now? As Bernanke says, that depends on whether gas's rise is temporary. Who knows? If oil's climb  mostly owes to geopolitical woes, the big question isn't when the Libyan uprising ends; it's whether that uprising spreads to a really important oil-producing nation like Saudi Arabia. If oil prices are rising because of strong demand from emerging markets, that's pretty much outside of our control, too. The one thing the U.S. could do to ease oil pressure, tap the strategic oil reserve, was given a thumbs-down yesterday by Energy Secretary Steven Chu.

So we wait.

What's an investor to do? If you think oil prices are headed up from here on out, you could do worse than buying the major oil producers: ExxonMobil (NYSE: XOM  ) , ConocoPhillips (NYSE: COP  ) , BP (NYSE: BP  ) , and the rest of those guys. There's a good chance they'll roughly track whatever oil does. But my favorite way to capitalize on oil mayhem is a bet on market volatility. That way, you'll likely keep your profits if rising oil sends the economy into recession and markets into further chaos. You can do so by wagering on the VIX index or writing options, as my colleague Dan Caplinger explains here.

Want more? Check out The Motley Fool's free report "The Only Energy Stock You'll Ever Need." Just click here to grab a copy.

Fool contributor Morgan Housel owns shares of Exxon. The Fool owns shares of ExxonMobil. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (28) | Recommend This Article (36)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 02, 2011, at 12:28 PM, LG3000 wrote:

    Why is MF so down on TSLA? TESLA won't even need to produce their sedan... All they have to do is sell licensing agreements to the major automakers to use their technology! Several major auto companies are already paying through the nose because they "inadvertently" re-invented hybrid technology and have now been forced to pay the inventor's company for patent infringement and to pay continuous licensing fees. That's the reason Toyota and Daimler bought into TESLA -- They will utilize TESLA technology, continue to develop it and continue paying TESLA. It may not be long until we hear that Toyota will produce the TESLA sedan. The writing is on the wall -- EV's are viable and the industry is poised to meet the expected surge in demand.

  • Report this Comment On March 02, 2011, at 12:44 PM, cmfhousel wrote:

    "Why is MF so down on TSLA?"

    The tesla reference in this article is positive. Higher oil prices are good for the company, as its cars become more relevant.

  • Report this Comment On March 02, 2011, at 1:57 PM, LG3000 wrote:

    I am sorry that I let out my frustration with TMF and TSLA in this article but I am somewhat surprised at how negative and short-sighted TMF has been since TESLA went public. This article is an improvement but how did you not see the forest fore the trees all this time? Did you "experts" honestly think that oil prices were going to remain stable for the long-term back when TESLA went public? I never saw an article from you that said anything truly positive regarding TESLA and now you seem to be doing the same negative thing regarding battery-makers when it all seems quite obvious... What gives? BTW -- I don't currently have any TSLA, but I hope to as soon as I can shed some of the boat anchors that you actually recommended (Really YRC/YRCW several months ago?).

  • Report this Comment On March 02, 2011, at 2:12 PM, cmfhousel wrote:


    Thanks for your comments.

    I've always been positive on Tesla, and wrote about its potential over a year before it went public.

  • Report this Comment On March 02, 2011, at 4:22 PM, fhuang3 wrote:

    Tsla is a scam.

    They are boating of producing Model S and then X. They claim that eveything is on track. However, they are not committing enough capital on Model S. They are also running out of cash.

    The model S will not arrive in 2012 as claimed. It would arrive in 2013 at best. Tsla will be bankrupt well before that.

    The notion of selling $50,000+ EV in large quantities is simply absurd.

    BTW, what technology does TSLA have? All they know is to string batteries together and make sure they don't overheat. In a addtion, they don't produce batteries. Tsla buy the batteries from suppliers like Panosonic. What is the margin there?

    The compition from Nissan Leaf, GM Volt, Ford Focus EV, Coda, BYD EVs, etc are cutting throat.

    By 2012, the EV market will be very crowded and the model S will not be ready at that time.

    Model S = too little, too late if it ever bears fruit.

  • Report this Comment On March 02, 2011, at 5:07 PM, Law3333 wrote:

    Interesting article. Oil imports now at 75%. 75% of cost of oil dollars going overseas. During Oil embargo, 1975, oil imports at 50% and caused all kinds of grief.

    Natural Gas imports around 2% to 3%.

    Autos running on compressed natural gas, not a new science. Honda Civic can be ordered to run on CNG.

    UPS uses CNG on many of their vehicles. City buses in many cities also.

    Why oh why is our government not "running" to mandate CNG vehicles and quit being subject to security in volatile areas? CNG equivalent price today is $1.39 a gallon. Oh, and CNG is green friendly, a lot more so than petrol. Hello America, it's time to wake up.

  • Report this Comment On March 02, 2011, at 5:28 PM, jszurek wrote:

    I am sorry, but I am growing weary of the whining about gasoline prices. If Americans cared about gas prices they would not be foolishly buying the overpowered, gas-guzzling SUVs and pickups I see crowding the streets. I want gas prices to increase. The consequences of gas being in the range of $4/gallon and above are that:

    (a) people will start to take fuel economy seriously, resulting in reduced volume of mideast oil sales, better vehicle design and purchase decisions, and more impetus for industry to shift to alternative power sources

    (b)Domestic oil production will increase as more oil will become economical to extract

    Both of these forces are exactly what we need to actually fix this problem. What we don't need is more of the same from big oil and big auto producers.

  • Report this Comment On March 02, 2011, at 5:55 PM, PSU69 wrote:

    For the Fools who drive 5,000 to 7,700# fuel guzzling Dodge or Ford or GM trucks empty 90% of the time I say hopefully gas goes to $5 by July then $8 by November. Wake up people.

    Get an e-bike. Get off the oil habit.

  • Report this Comment On March 02, 2011, at 6:26 PM, matthunt97 wrote:

    While it maybe true that many Americans do have so called gas guzzlers...but lets us assume you already own a high mpg vehicle, the higher cost of fuel it is still extra money out of your pocket. Now lets us pretend that I decide to purchase a high mpg vehicle to reduce the extra burden on my wallet of high fuel prices, the cost of the new vehicle may add to my over all monthly travel cost and not reduce my total outlay...... The assumption that high mpg vehicles is a cure to high fuel prices may not be true for every individual when considering the total cost of transportation. Further this may even hold for a majority of consumers....

    I think the winners in the current climate are people speculating in oil futures and oil companies, and not the public at large. The wish for more high mpg vehicles overall is not a short term solution but may be a long term goal with some validity and even that can be suspect if the initial assumptions are biased or incorrect .

  • Report this Comment On March 02, 2011, at 6:32 PM, matthunt97 wrote:

    Oh one more item.....I own a couple of those gas guzzling thingy ma---bobbers. I use them for work carrying survey gear on back roads in the west. So to suggest that a bike is the cure for my transportation needs is at best...______ (you fill in the blank)... I just hope I can pass on my increased cost to my customers without them howling to loudly...

  • Report this Comment On March 02, 2011, at 11:08 PM, pkluck wrote:

    @ iszeric "Domestic oil production will increase" it can't increase because nobama and the other dems won't allow any more drilling they have to have the tree huggers vote to get reelected. Fine by me let gas go to 7-8 dollars a gallon I have a large SUV, a boat, a snowmobile, wave runners etc. fewer people on the roads and on the lake is fine by me. I have to laugh the US has tons of oil and natural gas but we can't use it because???? so we import more and more oil from hostile nations, makes no sense to me.

  • Report this Comment On March 03, 2011, at 1:06 AM, jahunter9 wrote:

    I drive a 454 3/4 ton suburban. It gets 8 mpg and has a 42 gallon tank that i fill twice a week. I feel safe in it with my 2 precious children and wife on the freeway. I wish the USA would allow drilling for our own oil so I would not being paying our enemies for my transportation needs. The majority of my friends feel the same, and we vote.

  • Report this Comment On March 03, 2011, at 1:32 AM, Rowants wrote:

    Tesla- looks like a merger between DeLorean and Twenthieth Century Motor Car Corp., but without the cool Michael J. Fox movies.

  • Report this Comment On March 03, 2011, at 7:13 AM, rle1875 wrote:

    My 2010 Toyota FJ Crusier 4x4 with a 4.0L V-6 gets 23-24 miles per gallon on regular gas on the highway consistently.But-more importantly-it is the most fun vehicle I have ever owned. Every time I get in crank up the JBL stereo with speakers the size of a 17 in flat screen monitor--life is good-life is fun. It is worth every mpg less than my Honda Accord just because it is fun. Some of you guys seem to have forgotten that life is about smelling the roses too.

    Even if gas goes to 6 $ a gallon Americans will still have their love affair with fun vehicles.

  • Report this Comment On March 03, 2011, at 9:40 AM, midnightmoney wrote:

    I've got a coal-power clawfoot bathtub called The Lottery that gets negative miles per chunk, which is actually a boon because it keeps me in shape. It's got NFL football reception down inside the drain and paintball guns mounted starboard. It'll backfire you a tossed salad if you bring one and toss it out the back. We save money by taking it only to weddings and funerals. I feel triumphant dragging it with my girlfriend inside and her Aunt Antlers riding behind on her broom. We all vote too!

  • Report this Comment On March 03, 2011, at 10:42 AM, ecreek wrote:

    darn, and I thru out my clawfoot 3 years back. upgraded to a $25 stall from a garage sale. coal is sounding better all the time. I swore that if petroleum rose to cause gas to reach $4.50/gal again that I'd toss (reluctantly) my kerosene guitar. I just hope I dont cause Jimi any rotational unrest.

  • Report this Comment On March 03, 2011, at 12:20 PM, TMFBreakerRob wrote:

    Law3333: "Autos running on compressed natural gas, not a new science. Honda Civic can be ordered to run on CNG.

    Why oh why is our government not "running" to mandate CNG vehicles and quit being subject to security in volatile areas?"

    If you're anxious for the Feds to mandate CNG vehicles, can I presume that you already own a Honda powered by CNG? Do you find refueling to be an issue on trips?

  • Report this Comment On March 03, 2011, at 2:10 PM, JamieCK wrote:

    To those that want higher gas prices to deter people from buying "gas-guzzlers," you are forgetting that higher gas prices don't just affect the evil American drivers. It affects the price of food and goods, too, since it will cost more to transport those items. So it will affect you, too. Maybe you don't care, but for those who are really struggling, it just makes things worse. Even the good people who take public transportation still get hit from this. Even the bikers still have to eat.

  • Report this Comment On March 03, 2011, at 4:08 PM, plange01 wrote:

    remove obama from office and all the incompetents he brought in like bernanke and geithner will disappear!

  • Report this Comment On March 03, 2011, at 4:50 PM, Thaeger wrote:

    I wonder what'd be worse for offshore oil and the economy...regulators trying to regulate instead of just turning a blind eye to everything, or another Macondo...

  • Report this Comment On March 03, 2011, at 9:09 PM, FortyFever wrote:

    Forget about Oil's wrath. Bernanke should be worried about the citizzen's wrath, after they see the Academy Award winning documentary "Inside Job"


  • Report this Comment On March 04, 2011, at 12:51 PM, donaldo15 wrote:

    I dont get the left at all. Under Bush, gas goes up and it's his fault and the evil oil companies. Under Obama, nothing, except they WANT the gas prices to go higher so people wont drive big safe trucks.


  • Report this Comment On March 04, 2011, at 11:48 PM, rv3lynn wrote:

    I looked at the nat gas Civic pretty hard. It must be driven locally due to fueling limitations, sort of like an electric car. Not a problem for a commuter. The real problem is that the nat gas version is priced $5,000+ more than the regular gas model. So it takes like 50,000 miles just to break even. If Honda would price the nat gas car marginally above the gas gas car they might see some market penetration.

    As for U.S. govt support for this sensible option - Well they are Asleep at the Wheel, as usual.

  • Report this Comment On March 05, 2011, at 12:16 AM, rv3lynn wrote:

    I was a bit slow on this analysis. Suppose the Fed genius's (sorry) allowed a $7,500 credit for the nat gas Civic just like they do for the unobtainable electric cars. Then the nat gas Civic would cost less than the standard Civic and save lots of cheaper, cleaner fuel.

    Win, win, win, right?

    My definition of a genius, is, well.

  • Report this Comment On March 05, 2011, at 9:11 PM, Chippy55 wrote:

    The Hussein Obama administration has given the green light to exactly ONE of 14 applications to drill in the Gulf of Mexico, because this is part of his Cloward-Piven strategy of left wing ideology. In addition:

    The Hussein Obama administration says it will "tax the coal industry out of existence."

    He is completely ignoring Judge Vinsons 78 opinion that the Affordable (lol0 Health Care Act is UNCONSTITUTIONAL, and is further ignoring Judge Vinson's recent 20 page ruling that Hussein Obama CEASE AND DESIST implementation of said Act. Pelosi and Reid are also guilty of continuing to implement this act.

    Hussein Obama has issued 733 waivers to the Affordable Health Care Act, most of them to UNIONS, who continue the un-Holy alliance with the Democratic Party. HOW CAN YOU WAIVE SOMETHING THAT IS ILLEGAL?? DID YOU get your waiver? If YES, then you belong to a union, and YOUR President of YOUR UnIOn send PAC money to the Democratic Party, duh, that means that YOUR union wants something in return like, hmmm, bailing out GM at taxpayer's expense.

    Nancy Pelosi was responsible for 63 Liberal Democrats losing their job, because they kept staring at her bosom and said, Yes Mommy, when she told them to support the UNCONSTITUTIONAL AFFORDABLE (lol) HEALTH CARE ACT. 63 people lost their life's work because of her stupidity.

    Nancy Pelosi thinks that the murders in Arizona of those 6 people was "an accident". Are you kidding me? She called it an accident that a Congresswoman was almost assassinated, and a Federal Judge was killed.

    Bernanke is part of this administration which recently told the EPA to start treating a milk spill in Wisconsin "the same way as a petroleum oil spill"! Are you kidding me? Note: the reason for this asinine and absurd regulation is that COngressman Paul Ryan is from Wisconsin, and he's a Republican. Ergo, Hussein Obama thinks that the voters are going to blame Ryan instead of Obama's radical agenda. Sorry Charlie, we're smarter than that.

    If you people can't figure out yet that Hussein obama, who won't call them radical Muslims, and who has siad, quote, "The United States is not at war with Muslims", then you seem to have forgotten the innocent victims already of the Twin Towers, the Pentagon, the USS COLE, Beirut, and of countless acts of terrorism all over the globe.

  • Report this Comment On March 06, 2011, at 11:23 AM, Commonsense2453 wrote:

    For 30 years Presidents have paid "lip service" to developing alternative fuels. Both Reagan & Bush undercut funding on alternative fuel research, Clinton ignored it. We've been supporting the Middle East terrorists and dictators by purchasing their "cheap oil".

    Obama is the first President to propose cutting the TRILLIONS (yes- Trillions) of dollars of tax subsidies taxpayers have been giving to the international oil companies for the last 40 years. Without these subsidies from your tax dollars oil would not have been at the artificially low prices for the last 40 years. Why does every American taxpayer pay their taxes to subsidize the most profitable companies in the history of the world? So we can get "cheap" gas at the pump so alternative fuel sources won't be developed!!!!!

    If Obama can finally remove the oil companies tax subsidies (not much chance of that, but at least he's trying) the real cost we're paying for gasoline would become evident and alternative fuel sources would be price competitive......

  • Report this Comment On March 08, 2011, at 9:39 PM, Bloefeld wrote:

    The problem that no one wishes to face is that there is no energy advantage to any battery operated car. Everyone who thinks they are needs to read and understand the physics behind the second law of thermodynamics.

    The longer we keep chasing green energy solutions, the longer we keep from exploiting the several centuries of cheap energy we have and use that time to hunt down the bone-heads who are spreading inconcievable lies about climate change to our pin-headed politiicans.

  • Report this Comment On March 23, 2011, at 8:42 PM, golfer1john wrote:


    The problem is not (like the ethanol fiasco) how much energy it takes to run the car, but from what source that energy comes. Electric can come from hydro power, nuclear, coal, wind, solar, etc. Gasoline comes only from oil. Electric plants have to be built to satisfy peak demand, and electricity is priced higher during times of peak demand, and lower otherwise. You can recharge your electric car at night, when demand and prices are lower. It's not clear what you think are the sources of centuries of cheap energy, but if you mean oil as we know it today, I think the days of cheap energy are over. Solar may someday be so abundant as to be cheap, but not soon.

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