Energy price increases seem to be a large part of CPI growth. Many analysts are calling for even higher oil and fuel prices this summer. Demand is increasing, for now, supply remains constrained, and politicians are mostly finger-pointing. Let's dig into Oil and Inflation.
Energy & CPI
Well known economist David Rosenberg points out that much of the CPI gain is energy related.
Is this good news? If it's a demand issue, then maybe rate increases can help. It it's a supply issue, then perhaps not so much.
The U.S. Energy Information Administration estimates that "global consumption of petroleum and liquid fuels will average 99.6 million barrels per day (b/d) for 2022, a 2.2 million b/d increase from 2021, and 101.5 million b/d in 2023.
What's might be driving increased demand?
US consumers are getting ready for summer travel, amid less concern for COVID. Across the globe, China lockdowns are easing - oil imports increased in April, after falling for three months.
Per the Financial Times and Rapidian Energy Group, there is more than meets the eye in the touted OPEC supply increase. Some of the planned increases in production were already planned for later in the year. Smaller OPEC producers are struggling to meet demand. All in all, Rapidian estimates 355k b/d increase in supply.
The International Energy Agency initially estimated a loss of 3 million b/d loss due to sanctions on Russia, although has revised those estimated to 1 million b/d
Shale capacity in the US does not appear to be taking advantage of higher prices. The industry has $150bn of accumulated debt to pay off, so levering up further to fund new projects seems unlikely.
Refining capacity is down. You need refining to convert oil into usable fuels. Driven by COVID demand shock and green energy initiatives, perhaps as much as 1 million b/d of refining capacity in the US is now offline.
Out of Washington come recycled talking points on both sides. The left is blaming energy companies.
The right is blaming reductions in domestic production. Think Keystone pipeline.
Neither side has any good ideas. Perhaps less government intervention is the answer.
Any opinions or forecasts contained herein reflect the personal and subjective judgments and assumptions of the author only. There can be no assurance that developments will transpire as forecasted and actual results will be different. The accuracy of data is not guaranteed but represents the author’s best judgment and can be derived from a variety of sources. The information is subject to change at any time without notice.