Bernanke: Oil price spike could ‘stop the recovery’

Federal Reserve Chairman Ben Bernanke warned Tuesday that a major disruption in foreign oil supplies that sent prices skyward could thwart the economic recovery, but expressed optimism that the United States is becoming less vulnerable to such dislocations.

“A major disruption that sent oil prices up very substantially could ... stop the recovery,” he told the Senate Budget Committee, noting that oil price spikes feed inflation and act as a “tax” on consumers.

Turmoil in Libya helped send oil prices above $113 per barrel in late April and early May of 2011, pushing nationwide gasoline prices to almost $4 per gallon — a level exceeded in many areas — before falling back.

But Bernanke also noted that the country’s energy situation is improving.

“I think one of the more encouraging things over the last few years is the fact that with new processes and approaches, that the U.S. is becoming a much more prolific producer of fossil fuels and is also making progress on non-fossil forms of energy,” Bernanke said, according to a transcript.

“So for the first time in some time, I think there's a chance that we can move in the right direction in terms of reducing our exposure to foreign supply disruptions,” he said.

U.S. oil-and-gas production has risen in recent years, helping to reduce reliance on petroleum imports.

The U.S. Energy Information Administration, in a major forecast last month, predicted continued decreases in reliance on oil imports thanks to U.S. production growth, stronger fuel mileage standards, the growth of biofuels and other factors.

Imports, as a share of liquid fuels consumption, are forecast to drop from 49 percent in 2010 to 36 percent in 2035, according to EIA, which is the Energy Department’s independent statistical arm. That figure does not include further oil savings expected through upcoming rules to boost auto mileage standards for model years 2017-2025.

Bernanke said the slow recovery in recent years left the economy vulnerable to shocks.

"Indeed, last year, supply chain disruptions stemming from the earthquake in Japan, a surge in the prices of oil and other commodities, and spillovers from the European debt crisis risked derailing the recovery," he said, according to a transcript.

But Bernanke noted good news more recently. "Fortunately, over the past few months, indicators of spending, production and job market activity have shown some signs of improvement."

The economy added 243,000 jobs in January, according to the Labor Department, many more than had been expected. The unemployment rate also dropped from 8.5 percent to 8.3 percent.

Check out The Hill's On The Money blog for more on Bernanke's appearance on Capitol Hill.