Gasoline Prices Crimping U.S. Economy

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Written by Daniel Graeber for IIR News Intelligence (Sugar Land, Texas)

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Summary

A steady string of economic reports, both for the United States and globally, show the war-related spike in energy prices is taking a toll on the economy. Wholesale inflation for energy jumped nearly 10% in the U.S. market.

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Pain Spreading from the Gasoline Pump

As a consequence of the supply-side pressures stemming from the war, retail gasoline prices in the U.S. economy are creating major headwinds, data show. Travel club AAA listed the national retail average at $4.09 for a gallon of regular unleaded on Thursday, down from recent highs near $4.20, but still 30% above year-ago levels. According to Industrial Info Resources data, there are more than 250 operational refining-related facilities in the U.S.

Conflict in the Middle East began February 28 with joint U.S.-Israeli airstrikes on Iran. Retail gasoline prices from February to March increased 24%, compared with a 0.6% month-on-month decline last year.

Diesel prices too are on the rise, averaging $5.61 on Thursday, compared with $3.59 per gallon at this time last year. Some of the oil that's trapped behind the Strait of Hormuz is conducive to production of diesel, while crude oil prices account for the bulk of retail gasoline prices.

Oil prices are moderating on rumors of continued peace negotiations, though prices remain highly volatile due to the ongoing geopolitical risk. The price for Brent crude oil, the global benchmark, is trading in the upper-$90s range. But even with U.S. military forces on patrol in the region, some 20% of the world's waterborne crude oil and liquefied natural gas remains stranded.

"The slate will not suddenly be wiped clean in one fell swoop with the world going back to expecting 120 ships per day transiting the Strait of Hormuz," John Evans, an analyst at London oil broker PVM, wrote in a Thursday newsletter.

Economic Contagion

On Wednesday, the International Monetary Fund (IMF) lowered its global growth forecast and upped its inflation expectations due to the war. Anything from renewed trade tensions to continued geopolitical splintering could further undermine growth.

"Downside risks dominate the outlook," the IMF said.

Meanwhile, the energy component of the U.S. Producer Price Index (PPI), a measure of prices at the wholesale level, shot up 8.5% month-on-month to March, federal data show. PPI annual inflation to March was 3.6%, the highest since November.

On the refinery side, producers have already switched over to the summer blend of gasoline, which is more expensive to make. In Texas, Chevron on Monday idled parts of its Pasadena Refinery because of unspecified mechanical issues. The Gulf Coast, however, has a dense network of refineries that can serve as a buffer.

Elsewhere, Canadian Prime Minister Mark Carney this week waived taxes on road fuels to help alleviate the economic pressures from the war.

"Because of the Iran war, fuel prices have increased sharply around the world, including here in Canada," he said. "So we're taking more action to help bridge over short-term pressures."

Canadians are paying an average closer to the equivalent of $6.60 USD for a gallon of gasoline.

Relief, however, could incentivize demand and keep prices elevated. The International Energy Agency said this week that demand destruction, similar to the pandemic, would help ease the pressures from runaway commodity prices.

By the Numbers

• 8.5% month-on-month increase in the energy component of wholesale prices
• 56% year-over-year spike in retail diesel prices in the U.S. market

Key Takeaways

• War premium on energy prices taking a hefty toll
• Canada tries to tamp down the pressure with tax relief

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