Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / How a 12 Percent Weekly Oil Surge Is Rattling the Fed
Transcript
- Lucas: So Brent crude just crossed 100 dollars a barrel for the first time since early 2025. WTI is up 12 percent in five days. And the Dow dropped 600 points today. That is not a coincidence. Luna: The market is finally pricing in the war risk that's been building for weeks. But I want to talk about what this means for the Fed, because the headlines this afternoon are all about rate hike odds surging. Lucas: Exactly. The ten-year breakeven inflation rate — that's the market's expectation for average inflation over the next decade — ticked up to 2.28 percent on July 22. That's still below the 2.5-ish level that would really spook the Fed, but the direction matters. Luna: And we talk about this stuff because we think it matters for people's money and for understanding how the economy actually works. We don't take ads on this show — we keep it independent. If that's valuable to you, you can support us at buy me a coffee dot com slash fexingo. It's a small thing that keeps us going. Lucas: Totally. And speaking of things that matter — the real question is whether a 12 percent oil spike in a week pushes core inflation up enough to force the Fed's hand at the September meeting. Luna: Core CPI already ticked down to 336.1 in June. But oil feeds into everything — transportation, chemicals, plastics. Even services eventually. Lucas: Right. The Cleveland Fed's inflation nowcasting model shows that a sustained 10 percent rise in oil adds roughly 0.3 percentage points to headline CPI over six months. If WTI stays above 90, let alone 100, that's not trivial. Luna: And the market is already pricing it in. The odds of a rate hike in September jumped to around 35 percent today, up from 22 percent last week. Lucas: But here's the twist — energy stocks are booming while the rest of the market is selling off. XLE, the energy sector ETF, is up 3.4 percent in five days. Exxon and Chevron are up over 6 and 4 percent respectively. Luna: So it's a classic rotation out of growth and into energy. But the irony is that if oil stays high long enough to force a rate hike, even energy stocks will eventually get hit. Lucas: That's the tension. Higher oil = higher inflation = tighter policy = lower future growth. Energy is the only sector that benefits from the first step, but it gets crushed by the last one. Luna: Congress is also split on war powers resolutions today. That adds a political risk premium on top of the physical supply risk. Lucas: Yeah, the headlines out of D.C. are about resolutions to force Trump to abandon the Iran conflict. Markets hate that kind of uncertainty because it means the supply disruption could either escalate or get cut off by policy. Luna: And the Strait of Hormuz is the choke point. About 20 percent of global oil passes through there. If anything disrupts that, we're not talking 100 dollars, we're talking 120. Lucas: Let's anchor that with a concrete number. Brent is already at 101.84. WTI at 93.23. The five-day move in WTI is the largest since April 2020, when the pandemic was collapsing demand. This time it's a supply fear. Luna: Pipeline capacity is also an issue. The US can't just ramp up exports overnight to replace Hormuz barrels. Permian production is still growing but Permian oil is light sweet crude — not a perfect substitute for the medium sours that go through the Strait. Lucas: That's a great point. The refining system is configured for specific grades. So even if US production rises, it doesn't directly offset a Hormuz disruption. That's why Brent is trading at an eight-dollar premium to WTI right now. Luna: What about the natural gas side? Henry Hub is at 2.80, up 2.9 percent in five days. That's a much smaller move. Lucas: Gas is more domestic, less exposed to geopolitical shocks. But if oil stays high, you might see some industrial switching from oil to gas where possible, which could push gas up modestly. Luna: So the big picture is: oil at 100, breakevens creeping up, Congress fighting over war powers, and the Fed watching all of this. Lucas: And the market is now pricing in a non-trivial chance of a rate hike. If the breakeven hits 2.5 percent, that probability goes to 50 percent or higher. Luna: We should also note that core PCE, the Fed's preferred measure, is at 130.1 for May — that's up from 129.67 in April. Still low, but the direction is up. Lucas: Right. And that's before the full pass-through of this oil spike. The July PCE data won't come out until late August, right before the September Fed meeting. So the timing is really tight. Luna: One more thing — the clean energy stocks are not participating in this rally. ICLN is flat, TAN is down 2.4 percent, Enphase is down over 8 percent in five days. Lucas: Higher oil doesn't automatically mean clean energy wins, at least not in the short term. Higher interest rates hurt solar and wind because they're capital-intensive with long payback periods. So the oil spike is actually a double negative for renewables right now. Luna: Unless oil stays high long enough to shift consumer behavior and policy. But that's a multi-year story, not a five-day trade. Lucas: Exactly. And that's where we are on July 23, 2026 — a market that's suddenly repricing a whole range of assets around a single variable: the price of a barrel of oil. Luna: The next few weeks will tell us whether this is a spike or a new plateau. Lucas: And whether the Fed has to step in. That's the question that's going to drive everything from stock sectors to mortgage rates to the price of gas at the pump. Luna: Alright, let's leave it there. We'll track the breakevens and the headlines and come back to it.