To combat high unemployment, Fed Chairman Ben Bernanke has launched a third round of quantitative easing (QE3). The central bank will buy at least $40 billion of mortgage-back bonds per month, which should keep long-term rates low and help to keep the real estate recovery on track. More important, Bernanke says the program is “unlimited.” And yes, this is what sparked this week’s huge rally in stocks and gold.
Yet there will certainly be some fallout. Let’s face it, grand financial engineering is never clean.
One of the consequences is actually higher crude prices, which are almost at $100 (the highest level since May). But this could be just the start of a strong move.
Why? Because global crude oil is traded U.S. dollars, and the greenback is under pressure. It’s really simple economics. As Ben prints more money, the dollar’s value will go down.
The irony is that higher oil prices could cut into the effectiveness of QE3. Higher gasoline prices will put more strains on consumers’ ability to buy other things, especially for those with lower incomes. At the same time, various industries will feel the pain on their margins, such as the airlines.
Of course, many factors influence the price of oil. For example, if QE3 programs fail to improve unemployment, energy demand will likely be lower. At the same time, the U.S. has been getting more traction in finding new supplies, even to the point where an energy-independent America is within sight again. On the other hand, if prices spike much higher, the temptation to release crude form the Strategic Petroleum Reserve will climb.
Yet despite all this, the value of the U.S. dollar will remain a huge factor in the price of crude. And the Fed’s QE3 will likely keep oil prices at robust levels. Hey, it’s unlimited, right?
For investors, this means the environment should remain bullish for oil operators like ConocoPhillips (NYSE: COP), Exxon Mobil (NYSE:XOM), Chevron (NYSE: CVX) and Royal Dutch Shell (NYSE:RDS.A). Another way to play this trend is to buy an ETF, such as the Energy Select Sector SPDR (NYSEARCA:XLE).
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.