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Mind on Money: Gas prices spur inflation amidst oil industry uncertainty

By: Marc Ruiz Last Updated: July 25, 2022

I was driving north in my super thirsty pickup truck, mountain bike in the bed, when my heart jumped. A Speedway billboard showed gas for $4.57 a gallon, and I needed almost a full tank! What a deal. Coming back to my senses, reality reasserted itself. “I refuse to be excited about $4.57 gas,” I told myself, but of course, pulled in for a fill-up anyway.

Gasoline literally drives America. While I will admit, I am intrigued by the idea of an electric vehicle in my future, I am also certain it will be impossible to replace the gas automobiles in my family for quite some time. Gasoline itself may be the one communal experience we all share, and it’s fascinating how gas prices impact our perception of both our collective and individual economic well being.

Currently, I believe gasoline prices are serving as the perceptual foundation for the emerging economic malaise many are perceiving in our nation. The awful June inflation numbers reported this week, all exceeding expectations to the upside, may provide the headlines, but gas prices provide the story when it comes to inflation in our everyday lives.

Gas prices are complicated, but according to the U.S. Department of Energy, the price of the crude oil, which of course serves as the raw commodity for gasoline, comprises 56% of the end price of gas at the pump. While issues like refining, transportation and retail price spreads are not irrelevant to the conversation, gas prices are mostly a crude oil game, and as crude oil goes, thus goes gasoline. When crude goes up, gas goes up, and when gas goes up, we get collectively cranky, but the issue doesn’t stop there.

The United States has experienced three recessions during my financial career: the post dot.com bubble recession from March 2001 to November 2001; the Great Recession from December 2007 to March 2009; and the brief COVID recession of February 2020 to April 2020. A review of an oil price and recession chart from Bloomberg shows the 1991 recession, the 2001 recession and the 2007 recession were all preceded by price spikes in crude oil,while the COVID recession, which was very unique, was not. If we stretch this chart period out a bit time wise, recessions in 1969, 1973 and 1980 were also preceded by similar price spikes. That’s a very good batting average, and I would go so far as to say crude oil prices may have actual predictive ability when it comes to economic cycles.

With this in mind, one would think gas prices would be of the highest concern in the echelons of government. Remember the old-fashioned concept that in the United States of America, the government governs at the consent of the governed? Well, the governed drive to work, soccer practice, grocery shopping, dinner and family vacations, and we don’t like thinking $4.57 is a “good” price at the gas pump. What the heck is going on?

A little firsthand historical context may help. In 2015 the financial industry was being heavily focused on by the federal government. The Department of Labor was pressing investment firms to evolve their service standards to adopt a fiduciary business model. There was no congressional action or new law passed, the agenda was being implemented on the federal agency level alone, and regardless of opinions on the merits of this agenda, the DOL’s process wracked much of the financial business with uncertainty about the future. Very few investment firms invested in technology or additional employees during this time. The firm I was associated with ultimately decided to sell itself.

I believe this same process is occurring today with the oil and gas industry. Congress certainly has passed no law making oil more difficult to extract and refine, and we all know no politician wants to go into an election with gas at $5 a gallon, but agencies like the EPA and the Department of Energy are heavily focused on the climate change agenda, and the climate change agenda is simply not compatible with oil and gas. The result, in my opinion, is very similar to the financial industry in 2015. Under the stress of government attention, energy firms aren’t investing in exploration, new rigs and additional employees. They instead are limping along, uncertain of their future.

Once again, regardless of opinions on climate change, in America we drive, and if gas prices don’t come down neither will inflation. If inflation doesn’t come down, interest rates are likely to continue to rise and financial markets are unlikely to muster themselves out of the current bear market.

With abysmal polling numbers, perhaps the Biden administration will choose self-preservation over ideology and reverse course on energy. If not, we may continue to find prices at the gas pump to be highly correlated to the values of investment portfolios, only in the reverse direction.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. Precious metal investing involves greater fluctuation and potential for losses. Past performance is not a guarantee of future results. Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.