Rising oil prices convey greater risk than higher gas prices
Since June, crude oil prices have been steadily rising. Last week, the price for a barrel of West Texas Intermediate (WTI) crude oil reached $87.54, a 10-month high. WTI serves as one of the three main pricing barometers of the global petroleum industry, alongside North Sea Brent crude and Dubai crude. Over the past three months, the price for WTI has risen by more than 30%.
The catalyst for this rise in crude oil prices is an agreement struck in May by OPEC, Russia and other OPEC-friendly nations to reduce their collective production output. Their goal is that a reduced global supply of crude oil will push prices higher. Each of their respective economies are heavily dependent on crude oil production. Higher crude oil prices would help ensure their government coffers remain flush with cash. Led by its de facto leader Saudi Arabia, OPEC is a 13-nation oil cartel that accounts for nearly 40% of the world’s crude oil production.
The U.S. is the world’s largest consumer of crude oil, accounting for roughly 20% of total global consumption. China is second, accounting for 16% of consumption. Most crude oil (43%), is refined into the gasoline that powers our cars. Thus, the initial impact to consumers has been higher gasoline prices. According to the U.S. Energy Information Administration, the national average for a gallon of regular gas is $3.81, up 7.5% from June and 18.2% higher from January.
In Illinois, the average price is $4.01 per gallon, the tenth highest in the nation. In Chicago, the price soars to $4.55 per gallon. Iowa ranks No. 31, with the average price in the Hawkeye state at $3.80 per gallon. California posts the highest average price for a gallon of gas at $5.36 while the cheapest price belongs to Mississippi at just $3.28. Here in the Quad Cities, on the Illinois side of the river the average price is $3.95 per gallon. On the Iowa side, a gallon is $0.38 (9.6%) cheaper at $3.57.
But rising crude oil prices have a more expansive impact on our economy beyond higher prices at the gas pump. A barrel of crude oil is ultimately refined into the many products that impact most every facet of our daily lives. Other products include jet fuel and, to a greater extent, diesel fuel, which is used in trucks, railroad locomotives and agricultural machinery. Then there’s heating oil, which is used to heat homes, businesses and factories and to provide electricity to power plants. From that barrel of crude oil comes a myriad of other products such as lubricants, waxes and kerosene, to name just a few. Crude oil-based products are used in the manufacture of chemicals, synthetic rubber and plastics. The list goes on and on.
The point being made here is crude oil’s broader impact on inflation. One can argue the key driver in the rate of inflation falling from 8.9% in June 2022 to 3% in June 2023 was a decline in crude oil prices. During this 12-month window, the price for a barrel of WTI crude oil fell from $122 to just above $67.
But now that downward trend has quickly reversed course. Crude oil prices, along with the rate of inflation, are both edging higher. As crude oil prices rise, so do the costs of shipping and transportation, manufacturing and production, warehousing and general operating expenses. Ultimately, these higher costs get passed onto the consumer in the form of higher retail prices.
In July, the rate of inflation jumped from 3% to 3.2%. On Wednesday, the Department of Labor will release its latest inflation report for August. Many on Wall Street expect inflation to rise even higher, above 3.2%. The culprit, they argue, is rising crude oil prices. And if crude oil prices continue to rise, it may likely push inflation higher right along with it.
Mark M. Grywacheski, Investment Advisor
Quad Cities Investment Group is a Registered Investment Adviser.
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