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Last year, shortly after the World Health Organization (WHO) declared Covid-19 a global pandemic, governments around the world unveiled massive monetary and fiscal stimuli (over 15 million dollars in the world) in order to prevent the economic fallout from the pandemic. The US federal government has intervened with a wide range of measures, pumping an estimated $ 4 trillion into the economy; send money directly to households, increase unemployment benefits and create several new grant and loan programs for businesses.
It wasn’t long before politically influential actors such as Republican Senator Pat Toomey of Pennsylvania began to warn against “high asset prices and signs of inflation” thanks to the unprecedented level of government largesse. Even more alarmingly, economic experts have intervened with even more serious warnings of “hyperinflation”. For example, last year, New York Times bestselling author and founder of “The Bear Traps Report” Lawrence “Larry” McDonald cautioned against the “cobra effect” whereby stimuli designed to save the ‘economy will rather be’ …cause a hyperinflationary economic collapse ”.
True to its word, U.S. inflation rose rapidly and remained stubbornly high, fueled by growing consumer demand, supply chain constraints and soaring commodity prices, including the huge rally in the market. oil and gas. In August, the Consumer Price Index or CPI rose 5.4% year-on-year, marking the largest such increase since July 2008.
Oil prices and inflation are linked in a cause and effect relationship. As oil prices rise, inflation tends to move in the same direction. On the other hand, inflation tends to fall along with falling oil prices. This is the case because petroleum is a major input into the economy, and if input costs rise, the cost of finished goods is expected to rise.
Oil prices and inflation
President Joe Biden recently sought to allay fears that rising inflation could hurt America’s recovery and undermine his $ 4 trillion spending plans. It comes after US inflation has skyrocketed even as the economy continues to recover from lockdowns linked to Covid-19.
The rise in inflation is mainly due to a demand for goods and services exceeding the ability of companies to cope with the supply-side bottlenecks that hamper various industries, including the semiconductor and electronics sectors. solar energy. Significant stimulus funds, as well as a rise in the personal savings rate in the United States, contributed to this.
Related: Natural Gas Stocks To Watch As The Energy Crisis Goes Global
Republicans have already taken advantage of the alarming trend in inflation to oppose Biden’s ambitious spending plans, saying the country cannot afford additional government spending proposals that could boost the economy.
The Biden administration will likely feel a little nervous about high oil and gasoline prices, not only because of the role that oil has historically played in determining inflation trends, but also because of the risk they represent for its future political ambitions. It is a well-known fact that gas prices have a disproportionate impact on the psyche of consumers.
Gas prices currently sit at an average of $ 3.20 per gallon nationwide. While that’s only about 25 cents more than the average for the past 10 years, it’s over a dollar more than last year’s prices.
Fortunately, the link between oil and inflation has weakened considerably since the 1980s.
For example, during the 1990s and the Gulf War oil crisis, inflation remained stable despite the doubling of crude oil prices in six months, from $ 14 to about $ 30. This decoupling between the two measures became even more apparent during the rebound in oil prices from 1999 to 2005, when the average annual nominal price of oil rose from $ 16.50 to $ 50, while the CPI rose. of a much lower margin at 196.80 in December 2005, against 164.30 in January. 1999.
The price correlation between crude and gasoline has changed a lot over the years – in a way that does not favor the consumer. Most states have increased taxes on gasoline, refiners face new rules that increase costs, and there is a shortage of drivers for the trucks that deliver gasoline to gas stations.
Is high inflation bullish for oil?
The relationship between high oil prices and high inflation is therefore not so simple or straightforward.
Indeed, some experts have even advanced a somewhat roundabout argument that high inflation and a weakened dollar will push oil prices up and not the other way around.
Opportunistic LLP claims the US economy is heading towards pandemic-induced hyperinflation, arguing that what took five years to do with the latest QE has now been duplicated in less than a year. Analysts say that with such a rapid expansion of the money supply, it is only a question of when hyperinflation hits.
Source: JD Supra
Analysts say their models currently price West Texas Intermediate (WTI) crude oil in the $ 90 / bbl range, which is almost 16% up from current oil prices.
But here’s where it gets interesting: Experts argue that given the government’s insatiable appetite for spending, the dollar could be subject to a massive devaluation that will propel WTI prices north of $ 180 / bbl by the next. end of 2022.
We’re not entirely optimistic about this ultra-bullish outlook for the simple reason that it wouldn’t be favorable to the Biden administration.
Related: WTI Crude Oil Price Hits Highest Level in 7 Years
Oil analyst Patrick De Haan of GasBuddy said the hundred dollar oil today could bring us closer to the $ 4 per gallon mark. The $ 4 threshold is seen as a hot spot for drivers, with $ 4.17 being the all-time high for gas prices after oil prices hit $ 145 / bbl in the summer of 2008.
This is not lost on the Republicans, who have again seized the opportunity and blame Biden for the rise in gas prices.
The government still has the option of selling off its strategic oil reserves if the oil rally shows no signs of slowing down and OPEC + or even US shale producers fail to beat it, as analysts recently pointed out. from Pimco.
By Alex Kimani for Oil Octobers
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