Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Gasoline Is Above 4 Dollars While Core Inflation Is Cooling
Transcript
- Lucas: So the national average for regular gasoline just crossed four dollars a gallon — four dollars exactly, according to last week's data. That's up from three eighty-five just a week earlier. And we're in the heart of summer driving season. Luna: Ouch. And this is happening while core inflation — the version that strips out food and energy — is actually cooling, right? Lucas: Exactly. The June CPI report showed core CPI at three three six point one, down from three three six point one two the month before — barely, but still down. And the headline CPI also dipped. So you've got this weird split: the stuff you buy at the grocery store is getting a little cheaper, but the stuff you put in your car is getting noticeably more expensive. Luna: So what's driving gas prices right now? Is it purely oil? Lucas: Mostly. Crude oil is about fifty to sixty percent of what you pay at the pump. WTI crude settled at eighty-four forty a barrel on July 20, and Brent was at eighty-seven. But futures have been ripping higher this week — WTI futures, the prompt month contract, surged over seven percent in just five days. That's a big move. Luna: Seven percent in a week — that's not normal unless something structural is going on. Lucas: Right. And it's not just one thing. OPEC+ has been keeping production restrained — they've extended their cuts through the third quarter. There's also geopolitical risk premium from Middle East tensions, though that's been lingering for a while. What's new is that refineries in the US are running near capacity, and there's been some unplanned maintenance. So even if crude prices stabilize, the spread between crude and gasoline — the crack spread — is wide. Luna: So supply is tight on both ends: crude and refining. What about demand? Are we actually burning more gas this summer? Lucas: According to the Energy Information Administration, gasoline demand is actually slightly below last year — about one percent lower. People are driving a bit less, partly because prices are high and partly because more EVs are on the road. But that one percent dip is nowhere near enough to offset the supply constraints. Luna: So it's a supply-driven spike. Which means the Fed has a problem. Gasoline prices show up in the headline CPI, right? Even if core is cooling, people see the big number on the pump and feel poorer. Lucas: Exactly. And consumer sentiment took a hit in the July University of Michigan survey — it dropped to sixty-six point four from sixty-eight point two. The 'gasoline effect' is real. People change their spending habits when gas crosses that four-dollar threshold. Luna: But the Fed has been signaling they want to cut rates later this year. Does a gas price spike throw cold water on that? Lucas: It complicates things. The Fed focuses on core PCE, which excludes food and energy. The latest core PCE is at one thirty point one, up from one twenty-nine point six seven — so actually still rising, but modestly. And the ten-year breakeven inflation rate — that's the market's expectation for average inflation over the next decade — is at two point twenty-six percent, down from two point twenty-eight. So bond markets aren't panicking about this oil spike. Luna: So the market thinks this is transitory? Like, oil will come back down? Lucas: That seems to be the bet. But there's a risk: if oil stays above eighty-five and gasoline stays above four dollars through August, it could feed into higher inflation expectations and then into actual core inflation via transportation costs. Trucking, shipping, all that. Luna: Let's talk about the real-world impact. Four-dollar gas for a family driving a typical sedan means about a fifty-dollar fill-up. That's noticeable. Lucas: And it's not just cars. Higher gasoline prices mean higher costs for everything that moves on a truck. So you could see a second-round effect on food prices, even if grain prices are stable. That's the kind of thing that could keep headline inflation sticky even as core moderates. Luna: Look, this kind of analysis — connecting the pump price to the CPI to the Fed — takes time and resources. And I know Fexingo runs without ads, which is rare. Lucas: It's true. We keep the shows free and ad-free entirely through listener support. A small group of listeners already chips in monthly at buy me a coffee dot com slash fexingo, and that's what makes it possible to do deep dives like this instead of just reading headlines. Luna: Yeah, if walking through the economy with us has made something click for you, we'd be grateful if you joined that group. No pressure, just a transparent note. Lucas: Back to the gas pump — let's look at what happens next. Historically, oil spikes like this don't last long if demand is softening. China's economy is slowing, Europe is barely growing, and US job growth is cooling. So the fundamental demand picture is actually weakening. Luna: But supply is being artificially constrained. OPEC+ could open the taps — they have spare capacity, mostly in Saudi Arabia and the UAE. So the question is political: will they? Lucas: The Saudis want higher oil prices to fund their Vision 2030 projects. They need oil around eighty dollars to break even on their budget. So they're not in a hurry to flood the market. But if prices stay above ninety for too long, they risk destroying demand and inviting a recession, which would hurt them more. Luna: So we're in a delicate balance. And the US can't do much — the Strategic Petroleum Reserve is down after last year's releases, and US production is flat to slightly up, but not enough to move the global needle. Lucas: US crude output is around thirteen point two million barrels per day, which is a record. But we're still importing about eight million barrels a day. So we're not energy independent in the way people think. The global oil price still dictates our gas prices. Luna: Final thought: what would break this pattern? A diplomatic deal with Iran? A recession? A hurricane that shuts down Gulf refineries? Lucas: Any of those. But the most likely near-term catalyst is OPEC+ deciding to add supply at their next meeting in August. If they signal they're worried about demand, prices could drop five to ten dollars quickly. Until then, expect four-dollar gas to stick around through Labor Day. Luna: And if it doesn't come down, that four-dollar threshold might start showing up in the core inflation numbers after all. Lucas: Exactly. That's the story we're watching. Thanks for listening, and we'll be back tomorrow with another angle on the energy economy.