What’s Fueling Inflation?  Record Gas Prices!

The average price of a gallon of regular unleaded gas in the U.S. recently hit $5, a record high (see Chart 1 below).  This comes as U.S. consumer inflation in May reached its highest level in more than four decades, up 8.6% over one year (Chart 2).  In fact, surging energy prices have been the biggest driver of inflation globally this year (Chart 3).

Chart 1 – Price of Gasoline

Gas Blog

Chart 2 – CPI

Gas Blog 2

 

Chart 3 – Underlying Categories within CPI

Gas Blog 3

What’s happening:

Demand for oil and gas plummeted during the pandemic-related shutdown in 2020.  This caused many energy-producing companies to cut back on investments in production, or halt completely. The surprisingly fast economic recovery caught many of these companies unprepared to grow production quickly enough to meet the rebounding demand.  This drove prices up and depleted oil reserves.  

Russia’s invasion of Ukraine hasn’t helped. Prior to the war, Russia was the world’s largest oil and gas exporter, and sanctions on those exports have significantly impacted the market for crude oil.  

While higher crude oil prices broadly impact the cost of energy, the main issue behind the sudden spike in gas prices is the lack of global refining capacity.  The shortage of fuel-producing facilities that can transform oil into gasoline and/or diesel has pushed the price of both to record levels (Chart 4).

Chart 4 – Price Change in Oil vs Change in Production

Gas Blog 4

Between the lines:

  • Prices for energy jumped 34.6% from a year earlier
  • Average price of a gallon of gasoline nationally is $5+
  • Summer is the busiest driving season, putting increasing pressure on prices
  • Demand for diesel, the primary fuel for the trucking industry and other industrial users, has also soared as economic activity has picked up
  • Analysts are calling for oil prices to top $150 per barrel and for U.S. gasoline prices to hit $6 per gallon by the end of the summer
  • Oil companies are seeing record profits, but mostly returning it to investors instead of drilling more wells/increasing production facilities

 

Big Picture:

Prices for gas will continue to get more expensive if demand keeps growing, and supply continues to be restrained. For broadly diversified investors, these costs will somewhat be offset by exposure to oil and gas companies in their portfolios. For the foreseeable future, energy prices will continue to be a primary driver of inflationary pressures.

 

 Symmetry Partners, LLC, provides this communication on this site as a matter of general information. Information contained herein, including data or statistics quoted, are from sources believed to be reliable but cannot be guaranteed or warranted. Due to various factors, including changing market conditions and/or applicable laws, the content may not be reflective of current opinions or positions. All content on this site is for educational purposes and should not be considered investment advice, recommendation or offer of any security for sale.. Symmetry Partners does not approve or endorse any third party communications on this site and will not be liable for any such posts.

Investing involves risk, including the loss of some or all of your principal. Diversification seeks to reduce volatility by spreading your investment dollars into various asset classes to add balance to your portfolio. Using this methodology, however, does not guarantee a profit or protection from loss in a declining market.

Symmetry Partners, LLC is an investment advisory firm registered with the Securities and Exchange Commission (SEC). The firm only transacts business in states where it is properly registered or excluded or exempt from registration requirements. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. A copy of Symmetry's current written disclosure brochure filed with the SEC which discusses among other things, Symmetry’s business practices, services and fees, is available through the SEC's website at: www.adviserinfo.sec.gov.

 

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