Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Inflation Is Hitting 3-Year Highs as Oil Rises
Transcript
- Lucas: So oil is at 95 bucks a barrel this week. Brent is pushing 97 and a half. And we just got CPI data this morning showing inflation at a three-year high. The headline number hit 334 on the index. That's up from 332.41 last month. Luna: Right — and Trump was on TV today saying, quote, 'I love the inflation.' That's got to be one of the more confusing political reactions I've seen. Lucas: It's a wild moment. You've got oil prices that are up maybe 15 percent year to date, gasoline at the pump actually falling — regular is down to 4.15 from 4.30 a couple weeks ago — and yet core CPI excluding food and energy is still climbing. That's the part that doesn't fit the usual narrative. Luna: So if gas is cheaper, why isn't inflation coming down faster? Lucas: Because energy's weight in the basket has shrunk. Services inflation — rent, insurance, car repairs — those are stickier. And oil feeds into everything through transport and petrochemicals, but the pass-through isn't instant. The 10-year breakeven inflation rate actually dipped a touch to 2.33 percent. That tells me bond traders think this CPI spike is temporary or at least not accelerating. Luna: But the political reality is different. Trump is threatening more Iran strikes — CNBC's headline today was 'Trump pledges more Iran strikes, saying U.S. will be attacking them very hard.' That's not exactly a recipe for lower oil prices. Lucas: No, and the market reacted. The Dow dropped 700 points by midday. Oil prices barely budged because the geopolitical risk was already priced in — WTI is up half a percent over five days, Brent up nine-tenths. The real action has been in clean energy stocks. Luna: Yeah, what is happening there? Enphase is down 24 and a half percent in five days. First Solar down 19. The whole ICLN clean energy ETF lost 13 percent. That's brutal. Lucas: It's a rotation story, partly. When oil holds firm and inflation stays hot, investors start to think interest rates will stay higher for longer. Clean energy companies are capital-intensive — they borrow to build solar farms, battery plants. Higher rates crush their project economics. Enphase specifically had some analyst downgrades on inventory build-up in Europe. But the macro headwind is the bigger story. Luna: And yet natural gas is actually down a percent over five days — Henry Hub at 3.20. So it's not like all energy is rallying. Lucas: Exactly. Gas is a regional market, and we've had mild weather and strong storage builds. The oil market is driven by OPEC+ discipline and the Iran risk premium. Those are completely different forces. I think the clean energy sell-off is also about learning — investors are realizing that the transition isn't linear. It's going to be messy, with years where oil dominates and renewables get clobbered. Luna: It reminds me of that phrase — 'the green premium.' When oil is cheap, it's hard to justify expensive solar. But oil at 95 should help renewables compete on price. So why aren't they? Lucas: Because the cost of capital matters more than the fuel cost right now. A solar farm's levelized cost is heavily weighted toward upfront construction. If your borrowing cost goes up 200 basis points, that adds 10 to 15 percent to your effective electricity price. Meanwhile, a gas plant can be built faster with less debt, and the fuel cost — gas at 3 dollars per MMBtu — is still cheap. So utilities are building gas, not solar, as we talked about a few episodes ago. Luna: And that's showing up in the data. The core PCE price index — which the Fed watches — was at 129.6 in April, up from 129.32. Services inflation is persistent. Lucas: Yeah, and that's the knot the Fed can't untie. If you raise rates to kill services inflation, you crush the sectors that need cheap capital — like housing and clean energy. If you cut rates to help those sectors, services inflation stays hot. They're stuck. Luna: So what does this mean for listeners who are trying to make sense of their own energy bills or investments? Lucas: I think the big takeaway is that inflation isn't one story. Oil is high, but gasoline is down at the pump — that's refiners passing on lower margins. Services are still inflating, but the bond market isn't panicking. And clean energy is getting crushed, but that's not because the transition is failing — it's because the macro environment is hostile to capital-intensive growth. You have to look at each layer separately. Luna: It's funny — we do this show ad-free, and sometimes I think that forces us to actually explain things rather than just fill time for a sponsor read. If walking through the economy with us has made something click, there's a way to support that choice. Lucas: Yeah, we deliberately don't run ads. No commercials, no sponsored segments. If you value that and want to help keep it that way, the link is buy me a coffee dot com slash fexingo. That's it. No pressure. Luna: And we mean it — we'd rather do this for ten years with a small group of listeners who find it useful than chase scale with ads. So thanks for being part of it. Lucas: Alright, back to the data. One thing I'm watching is the divergence between oil majors and the exploration and production companies. Exxon is down three-tenths over five days, but Chevron is up one and a half percent. ConocoPhillips up one point two. The XLE energy sector ETF is flat, but the XOP exploration and production ETF is down almost a percent. Luna: What's driving that split? Lucas: Part of it is hedging. The producers that locked in prices when oil was higher are now seeing their hedges expire, so their realized prices are dropping. Integrated companies like Chevron have refining and chemicals to smooth things out. Plus Chevron announced a big buyback this week — that always gives the stock a bump. Luna: And the clean energy names — Enphase at 51.64, First Solar at 253.83 — do you see a floor? Lucas: Hard to call a bottom when the macro headwind is still strengthening. But the sell-off might be overdone. Enphase's revenue is still growing in absolute terms — just not at the hypergrowth rate the market wanted. First Solar has a massive backlog of orders thanks to the Inflation Reduction Act. If the Fed signals a pause in rate hikes, those stocks could bounce 20 percent in a week. Luna: But that's a big if. Lucas: It is. And today's CPI number makes a pause less likely. Core CPI is still running at about 3.3 percent annualized. That's above the Fed's target. So we're probably looking at rates staying where they are through the fall. That's a tough environment for any growth stock, clean energy or not. Luna: And yet oil at 95 is a signal that the economy is still consuming a lot of energy. That's not a recession signal. Lucas: No, it's not. In fact, the oil market is basically saying the global economy is chugging along. The Iran threat adds a few dollars of risk premium, but demand is real. The question is whether the Fed can cool services inflation without tipping the whole thing into recession. That's the 2026 puzzle. Luna: Alright, I think we've covered a lot. Final thought? Lucas: Just this: don't confuse the stock market's reaction with the real economy. Clean energy stocks are getting hammered, but the actual deployment of solar and wind is still growing. And oil stocks are up, but the underlying commodity is at a level that historically has preceded demand destruction. The energy transition is happening — it's just happening on a bumpy road. Luna: And we'll keep tracking it. Thanks for listening.