West Texas Intermediate (WTI) crude oil was trading down more than 5% late Friday morning and was on track for its first weekly loss in eight weeks. Brent crude was trading down more than 4.5% and was expected to lose more than 5% for the first time in five weeks.
The double dip is a reaction to the Federal Reserve’s 0.75% interest rate hike earlier this week. Investors are more than a little worried that a faster-than-expected effort to calm inflation could tip the economy into a recession.
While it’s easy to blame the Fed for rising gasoline pump prices ($5.00 a gallon, according to GasBuddy, down from Thursday’s record price of just over 5, $03), it’s important to understand that the Fed’s only tool to fight runaway inflation is raising interest rates until demand drops and the economy slips or plunges into a recession.
The US Congress and the President have used virtually none of their best toolboxes in the fight against inflation. In the House and Senate, the Republican side of the aisle is more interested in shedding Democratic control of both chambers in the November election. Politically, inflation is something they can blame Democrats for, and it’s a proven source of votes.
For Democrats, the president ordered the release of nearly 200 million barrels of crude from the National Strategic Petroleum Reserve at the rate of about 1 million barrels per day. That’s about 5% of daily US 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 at full throttle for the past 18 or so months, as it has led to historically low unemployment. Reuters energy analyst John Kemp suggests this was the wrong choice: “In fact, it was the fuel system, not the labor market, that failed. proved to be the limiting factor in the economy, which upset the economic and political strategies of the White House. Classes.”
Worse still, writes Kemp, 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. Airlines, truckers, farmers and railroads, among others, who are the biggest users of these fuels, have contributed to the higher costs that consumers pay for a whole range of products.
US refineries are trying to meet the demand for middle distillates at the expense of gasoline production. Kemp is right about this: “The focus on middle distillate manufacturing is already at the expense of declining gasoline production and inventory, which is driving up gasoline margins and prices, costing motorists even more at the pump.” In case anyone 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 US exports of crude oil and refined products? On the negative side, cutting off exports to Europe will do nothing to maintain good relations with Europeans, and a ban will also have little long-term impact on domestic gasoline prices. This would likely have the short-term effect of lowering prices at the pump for US consumers. This is no mean feat in an election year.
Biden has also written to oil company executives, saying that “in times of war” it is unacceptable for the oil industry to post record profits. Instead, the industry should increase both its refining capacity and its production capacity.
Biden also demanded an explanation for the loss of 800,000 barrels per day of refining capacity since 2019. It’s simple: the explosion and subsequent bankruptcy of a PBF refinery in Philadelphia cost 335,000 barrels per day ; converting a refinery in Marathon, 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 an additional 240,000 barrels per day. That is a total of 736,000 barrels per 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 likely even in the next quarter.
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The issues surrounding pump prices are thorny, and there’s not much the President or Congress can realistically do to ease the pain at the pump. This leaves the Fed in the unfortunate position of having to fight high prices at the pump by essentially causing a recession. But then, Fed governors are appointed, not elected.
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