West Texas Intermediate (WTI) crude oil was trading down more than 5% in the late morning Friday and was on track for its first weekly loss in eight weeks. Brent crude traded down more than 4.5% and was set to lose more than 5% for the first time in five weeks.
The twin drop is a reaction to the Federal Reserve’s 0.75% interest rate hike earlier this week. Investors are more than a little concerned that a faster-than-expected effort to cool inflation will tip the economy into a recession.
While it is easy to blame the Fed for higher pump prices for gasoline ($5.00 per gallon, according to GasBuddy, down from Thursday’s record-setting price of just over $5.03), it is important to understand that the Fed’s only tool to fight raging inflation is lifting interest rates until demand falls and the economy creeps or dives into a recession.
The U.S. Congress and the president have put virtually none of their more well-stocked toolboxes to use in the fight against inflation. In the House and the Senate, the Republican side of the aisle is more interested in shaking off Democratic control of both houses in the November elections. Politically, inflation is something that they can blame Democrats for, and it is a proven vote-getter.
For Democrats, the president has ordered the release of nearly 200 million barrels of crude from the nation’s Strategic Petroleum Reserve at the rate of about 1 million barrels a day. That amounts to about 5% of daily U.S. consumption, probably not enough to combat the price spike following the Russian invasion of Ukraine.
Congressional Democrats and the president have been happy to let the economy run hot for the past 18 months or so because it has resulted in an historically low unemployment rate. Reuters energy analyst John Kemp suggests that that was the wrong choice: “In the event, the fuel supply system, not the job market, has proved to be the economy’s rate-limiting factor, which has thrown the White House’s economic and political strategies off course.”
Worse, Kemp writes, is that the Biden administration has focused on gasoline and the real problem has been the lack of middle distillate fuels: diesel fuel and jet fuel primarily. The airlines, truckers, farmers and railroads, among others, that are the heaviest users of these fuels have contributed to the higher costs consumers pay for a whole host of products.
U.S. refineries have been trying to meet the demand for the middle distillates at the expense of gasoline production. Kemp is right about this: “The intense focus on making mid-distillates is already coming at the expense of lower gasoline production and stocks, which is driving up gasoline margins and prices, costing motorists even more at the pump.” In case anyone has missed it, diesel fuel costs $0.70 to $0.80 more per gallon than regular gasoline.
Will President Biden use his emergency powers to impose a ban or some level of restriction on U.S. exports of crude oil and refined products? On the negative side, cutting off exports to Europe will not do anything to maintain good relations with the Europeans, and a ban also will have little long-lasting impact on domestic gasoline prices. It probably would have the near-term effect of lowering pump prices for U.S. consumers. Not a trivial consideration in an election year.
Biden also has written to oil company executives, claiming that “in a time of war,” it is unacceptable for the oil industry to be reporting record profits. The industry should, instead, increase both refining and production capacity.
Biden also demanded an explanation for the loss of 800,000 barrels per day of refining capacity since 2019. That’s an easy one: the explosion and subsequent bankruptcy of a PBF refinery in Philadelphia cost 335,000 barrels per day; the conversion of a Marathon refinery in California to renewable production cost 161,000 barrels per day; and the closure of a Shell refinery in Louisiana that is also being converted to low-carbon fuels cost another 240,000 barrels a day. That is a total of 736,000 barrels a day.
Neither refining capacity nor increased crude oil production can happen quickly. Calls for more drilling or more refining capacity are not solutions to high gas prices today or next week, or probably even next quarter.
The issues swirling around pump prices are thorny, and there is not much that the president or the Congress can realistically do to ease the pain at the pump. That leaves the Fed in the unhappy position of having to fight high pump prices by essentially causing a recession. But then, Fed governors are appointed, not elected.
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