More Oil May Not Be Economic Panacea

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Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--Washington is sending clues that it can address market shortages triggered by the isolation of Russian materials, though that may be low-hanging fruit, given ongoing inflationary pressures.

U.S. Energy Secretary Jennifer Granholm said during the CERAWeek energy conference in Houston last month that the Russian invasion of Ukraine created a global and economic emergency.

"I don't have to tell you that when oil is $112 a barrel, and $4.25 at the pump, the impacts are severe and real for people who buy your product--regular working folks, from Uber drivers to teachers to farmers," she said.

As such, the energy sector should be "on a war footing," she said, to address the emergencies sparked by the Russian invasion.

Russia is a lead producer of crude oil, natural gas and other staple commodities such as wheat. Western-backed sanctions and concerns among shippers of being caught with untradeable goods means many of those products are off limits.

For oil, the International Energy Agency estimated that as much as 3 million barrels of Russian oil per day (BBL/d) could be stranded as a consequence of war-related issues. Few major producers have the ability to put much more on the market to make up for the difference.

Granholm, however, said that U.S. shale oil producers were ready to respond. In an article published by Reuters, Granholm was quoted as saying on Monday that U.S. production will continue to increase to make up for the loss of Russian barrels.

Russia can usually churn out around 10.5 million BBL/d. Total U.S. crude oil production for the week ending April 15 averaged 11.9 million BBL/d. By next year, the government estimates output will reach 13 million BBL/d, besting the previous record set in 2019.

That will help address at least some of the market constraints. But oil is only a part of the equation.

U.S. inflation was already at multi-year highs before Russian forces crossed the Ukrainian border in late February. Resurgent demand in the post-vaccination stage of the pandemic and supply-chain issues, among other pressures, all contributed to a spike in consumer prices last year, and not just at the gasoline pump.

Over the 12-month period ending in March, the federal government said the average cost for all consumer goods increased 8.5%, the fastest increase since 1981. Going out to eat is actually cheaper than dining at home, with the cost of food for at-home cooking and consumption up 10% over the last year. A used vehicle is 35% more expensive than it was a year ago.

Orders for durable goods--items such as new washing machines--inched up 0.8% in March, a reversal in recent trends but lower than expected.

That indicates that there are more things at stake than just high commodity prices. Granted, oil products are just about everywhere-- they power cars, they're in plastics, they're in our clothes-- but tapping more oil is not a panacea. Economic policy, meanwhile, rests with the U.S. central bank and in the Treasury Department, not with Granholm.

That said, the price of oil is readily apparent on a daily basis, reflected for the average consumer at the gas pump. The more consumers pay for gasoline, the less money they have to spend on going out to eat or on new washing machines.

John Kemp, a senior market analyst for Reuters, notes that most U.S. consumers feel this is a "bad time to buy" because of elevated prices. That, he said, is a hint of a looming recession. "Spikes in the 'bad time to buy' measure usually correspond with end-of-cycle recessions or at least mid-cycle slowdowns," he said.

Higher prices may eventually be their own undoing as demand wanes under the pressure. The latest U.S. data show consumer demand for fuels is already on the decline, but the results won't be immediate and much depends on how the post-war dust settles.

But for now, the economy may be stuck in a period of "higher-for-longer prices," with or without more oil.

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