U.S. consumers are likely to feel a modest jolt in commuting costs, as wholesale gasoline futures now point to an 8 percent rise in retail gasoline prices in coming days, with risk of a much more pronounced increase to follow.
The surge is due to non-market derived pricing action caused by a recent policy shift from Washington on waivers around imports of Iranian oil. The shift resulted in a decline of 700,000 to 800,000 barrels per day, which triggered a 4 percent increase in futures of Brent Crude and a 3.8 percent rise in those of West Texas Intermediate. These increases will ultimately result in a loss of personal disposable income and overall household consumption in the current quarter.
The new policy shift reinforces the sharp recovery in the price of West Texas Intermediate, which is up 41.92 percent this year and the global benchmark Brent Crude, which has risen 35.5 percent, largely due to declining global oil production. U.S. gasoline stockpiles were off by 0.9 percent, or 2.13 million barrels to roughly 226 million barrels last week.
Through the end of March, OPEC production reached a four-year low of 30.4 million barrels per day, down 280,000 daily barrels from February; 79 percent of the drop was directly attributable to the 220,000-barrel-per-day reduction by Saudi Arabia.
These increases will ultimately result in a loss of personal disposable income and overall household consumption in the current quarter.
Due to the rapid deterioration of production in Venezuela and associated geopolitical driven declines across the Middle East and North Africa, it is highly unlikely any economy other than Saudi Arabia—which has a million barrels of spare capacity—can step into the market to fill the gap. At this point there is simply no indication that Saudi Arabia, whose relationship with the United States has been fraught in recent months, intends to do that.
Higher prices for the holidays
Thus, the U.S. public should prepare for higher prices entering the summer driving season, when gasoline prices have traditionally peaked on or around the July 4 holiday.
Despite the decade-long increase in domestic oil production, in our estimation, the United States is not in a position to make up lost global supply; domestic infrastructure constraints will not permit the economy to export our highly desired light sweet crude to foreign buyers.
One little understood reality about the domestic U.S. oil complex is that domestic refining capacity is aligned with refining heavy sour oils that countries such as Canada and Venezuela produce. It will be a number of years before the refinery and pipelines will be in place to permit the United States to utilize its prodigious capacity to produce significant shipments destined for export to make up for shortfalls caused by non-market action. Thus, the non-market-derived pricing actions now imply upside risk to retail gasoline prices, all of which will be absorbed by American consumers.
For most of the past 50 years an increase in oil prices that flowed through to consumers through higher retail gasoline prices would set off alarm bells in Washington over declining consumption and higher inflation. While the structure of the economy has changed—consider fuel efficient autos, the shift to natural gas and renewables, and offsetting increases in capital expenditures in oil and mining—the sensitivity of the policymakers has not evolved in a similar fashion. So, one should anticipate calls for use of U.S. strategic oil reserves to mitigate the shortage of global supply that will follow the actions taken by the White House this week.
At this point, a single-digit increase in gasoline prices, which will feed into headline inflation over the next few months, is likely not to move the Federal Reserve off the prudent pause it has signaled to the market. We do not expect any move from the Fed on higher lending rates until late 2020 or early 2021 at the earliest.