Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Gasoline Stays High While Oil Prices Slide
Transcript
- Lucas: So the headline number everyone's watching this week: WTI crude is at 82 dollars a barrel, down from 86 just a few days ago. Brent's at 88.9, down from nearly 97. And yet regular gasoline is still 4.08 a gallon. That's only down two cents from last week. Luna: That's the gap that keeps confusing people. Oil drops, but the pump doesn't budge. What's actually going on? Lucas: Part of it is the crack spread — the difference between what refiners pay for crude and what they get for gasoline. Right now that spread is historically wide. Refiners are pocketing the difference, and they're not in a hurry to pass it along. Luna: So is this just greed, or are there real costs eating into that margin? Lucas: It's not just greed, though that's part of it. Refinery capacity in the US is still tight after the pandemic closures. When a plant goes down for maintenance or an unplanned outage, the margin for everyone else widens. And we're also heading into the summer driving season — demand is strong, so they can hold prices. Luna: But if oil keeps falling, wouldn't that eventually force gas prices down? Lucas: There's a lag. Retail gas prices tend to follow crude with a few weeks' delay, and they're slower to drop than to rise. That's the 'rockets and feathers' pattern — prices shoot up like a rocket but fall like a feather. Luna: Right, I've heard that. So consumers are stuck paying 4 bucks while the oil market is doing the opposite. That has to feed into inflation sentiment. Lucas: Exactly. And the latest CPI data from June actually showed headline inflation cooling — CPI is down to 332.6 from 334. But core CPI, which strips out food and energy, is basically flat. So the oil drop isn't showing up in the inflation numbers yet because gas prices haven't followed. Luna: So the Fed is looking at core inflation, not gas prices, when they decide on rates. Lucas: Exactly. And that's why you see the ten-year breakeven inflation rate ticking up to 2.26 percent. That's a market-based measure of where inflation is headed, and it's rising even as oil falls. That tells you the market is more worried about other things — tariffs, the labor market, maybe the Fed's independence. Luna: Speaking of the Fed, the headlines this week are all about Trump trying to fire Lisa Cook. How does that factor into the inflation picture? Lucas: That's a different kind of risk. If investors think the Fed could be pressured to keep rates lower to please the White House, they might price in higher inflation down the road. The bond market doesn't like political interference in monetary policy. Luna: So it's not just oil — it's the whole policy mix. Lucas: Right. And that's why the energy market is also seeing a divergence between oil stocks and clean energy. Look at the ETFs: XLE, the energy sector fund, is down 2.1 percent over the week, while ICLN, the global clean energy ETF, is up 1.6 percent. Solar stocks are surging — Enphase is up 5.7 percent, First Solar is up 8.3 percent. Luna: That's a huge contrast. Why are solar stocks rallying while oil companies are sliding? Lucas: Part of it is that oil prices are falling, which hurts the oil majors' revenue outlook. But clean energy stocks are also benefiting from the policy tailwind — the Inflation Reduction Act is still driving investment into solar and wind. And some investors see oil's decline as a signal that we're closer to peak demand, so they're shifting capital. Luna: That makes sense. But the fall in oil prices is also driven by supply, right? The Hormuz deescalation and the potential Iran deal chatter. Lucas: Yeah, the market has been trading on headlines about a possible deal that keeps the Strait of Hormuz open. That's why we saw that 14 percent weekly crash a few weeks ago. But the reality is that no formal deal has been announced, and prices are still above 80 — so there's a lot of uncertainty baked in. Luna: So if a deal does happen, we could see another leg down. What would that do to gas prices? Lucas: It would eventually push them lower, but again, with a lag. And if the crack spread stays wide, the pass-through might be slower than you'd expect. The real question is whether refinery margins normalize. If they do, a 10 percent drop in oil could translate to a 20 or 30 cent drop at the pump. If not, we might see gas stuck above 3.50 for a while. Luna: And that's the kind of thing that keeps inflation sticky even when the headline number cools. Lucas: Exactly. And speaking of things that are sticky — you know, we talk a lot about these price dynamics and how they affect your wallet. If walking through the economy with us has made something click, and you feel like buying us a coffee helps, there's a link for that. It's buy me a coffee dot com slash fexingo. No pressure, but it does keep this show ad-free. Luna: Yeah, and it's a small way to support the work we do. Even one coffee helps. Lucas: So back to that gap — one thing I want to drill into is the natural gas side. Henry Hub is at 2.81 per MMBtu, up from 2.59 last month. That's a 8.5 percent rise, and that's also feeding into electricity costs, which affects the broader energy picture. Luna: Natural gas is up while oil is down. That's another divergence. What's driving that? Lucas: A lot of it is weather — record heat in the South and Southwest is boosting demand for air conditioning, and that means more gas-fired power generation. Plus, LNG exports are taking up a bigger share of supply, so the domestic market is tighter. Luna: So higher gas prices could actually push electricity bills up, which is another inflation headache for households. Lucas: And that's a big deal because electricity costs are one of those categories that feeds directly into consumer sentiment. People notice their power bill more than they notice the price of a barrel of oil in a futures contract. Luna: So we've got oil falling, gas at the pump staying high, and natural gas rising. Is there any good news for consumers in this? Lucas: The good news is that if oil stays down and refinery margins normalize, we should see some relief at the pump by fall. The bad news is that natural gas prices could stay elevated through the summer, which means higher cooling costs now. And the Fed is still trying to figure out if this is a blip or a trend. Luna: So what should we be watching in the next few weeks? Lucas: Watch the weekly gasoline inventory numbers from the EIA. If they start building, that's a sign that refiners are catching up and prices might ease. Also watch the news out of Iran and the Strait of Hormuz — any escalation could send oil right back up. And keep an eye on the Fed's next meeting, because if they signal a pause or a cut, that could weaken the dollar and push oil prices higher again. Luna: So it's a delicate balance. Oil down, but gas not yet down, and natural gas up. The whole energy complex is just a mess of cross-currents. Lucas: It is. And that's what makes it fascinating — you can't just look at one number. You have to understand the entire chain from the wellhead to the pump, and then add in the policy and geopolitical layers on top. Luna: Well, that's what we're here for. Thanks for breaking it down for us. Lucas: Anytime. And if you're curious about how any of this connects to your own energy bill, let us know — we might do a follow-up on electricity prices specifically. Luna: That would be useful. I know my last bill was a shock. Lucas: Yeah, mine too. Alright, that's it for today. We'll be back tomorrow with another look at the numbers behind the headlines.