Crude-Oil, Gasoline Prices Climbing 2011

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Crude-Oil, Gasoline Prices Climbing 2011

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Oil prices rose and gasoline futures hit a fresh 33-month high on a mixed day for commodities after Federal Reserve Chairman Ben Bernanke said the central bank is unable to halt surging raw-materials prices.

The central bank held interest rates close to zero at its monthly meeting, and said rising prices for oil, grains, cotton and other basic goods were "transitory."

In the first-ever press conference following the central bank's monthly meeting, Mr. Bernanke said growing energy use in emerging markets and unrest in the Middle East and North Africa limit what the Fed can do to calm commodity-price spikes.

"It's obviously a very bad development to see gas prices rise so much," said Mr. Bernanke. Still, he added, "The Fed can't create more oil."

Mr. Bernanke's statements come as the costs of gasoline and other basic goods have surged in recent months, with U.S. retail gasoline prices averaging $3.87 a gallon, more than a dollar higher than a year ago. Corn prices have more than doubled over the past year, while cotton has hit records.

On Wednesday, gasoline futures rose to their highest since July 2008, jumping 1.9% to $3.4194 a gallon on the New York Mercantile Exchange after government data showed U.S. gasoline stockpiles fell for the tenth-straight week. Oil futures edged up by 0.9% to settle at $112.76 a barrel. Meanwhile, wheat and cotton plunged more than 4%, and copper fell 2.1%.

Businesses have passed on higher gasoline costs, and high pump prices are forcing consumers to cut spending in other areas. But the Fed, in its dual

mandate to keep unemployment and inflation low, is wary of raising rates to combat rising prices when unemployment remains near 9% and the economic recovery is still tenuous.

Because the Fed is trying to anticipate what the economy will need twelve to eighteen months from now, "today's oil price may not be a good indicator of where things will be," said Tim Evans, an energy analyst with Citi Futures Perspective.

Inflation is seen rising between 2.1% to 2.8% this year due to higher food and energy prices, but underlying inflation—which disregards food and energy costs—is expected to stay below 2% through next year.

The Fed has historically followed this second number in guiding its policy decisions, in contrast to the European Central Bank, which appeared to focus more on the rise in raw material costs when it raised its key policy rate to 1.25% earlier this month.

But traders and analysts say the Fed's policy to keep rates low has led to a flood of investment into commodities, which are considered a safer store of value in periods of rising prices. Gold futures rose 0.9% to set a new record of $1,516.70 an ounce.

"Oil prices have soared for the simple reason that the dollar is weak, and that's going to be the case until they raise rates," said Rich Ilczyszyn, an oil market strategist at Lind-Waldock. "We're going to continue to go upward."