According to the Energy Information Administration (EIA), the United States is the world’s top crude oil producer. Yet, crude oil prices are just coming off a six-year high, begging the question: if the United States produces so much oil, why are domestic crude oil and fuel prices breaking records, and what does this mean for the macroeconomy at large?
Crude prices go bungee jumping
A July 2021 White House report highlights how inflationary episodes are often set off by oil shocks. During the COVID-19 (coronavirus) pandemic, oil prices initially collapsed and have since surged to record levels. According to EIA data, the largest petroleum consuming sector in the United States was the transportation sector, accounting for 66.0% of total domestic annual consumption in 2020 (latest data available). As households hunkered down and travel demand declined sharply, so too did demand for crude oil inputs in motor and jet fuel manufacturing; in fact, crude oil futures briefly traded at a negative in May 2020. As consumer demand roared back to life in the third quarter of 2020, oil producers, refiners and pipeline operators simply did not have the capacity to meet the surge in demand, and thus, prices skyrocketed.
Fuel-injected inflation
Rising oil prices spell double trouble for industrial operations such as manufacturing, since the EIA denotes that 28.0% of petroleum in the United States is consumed for these purposes. Rising oil prices will likely ripple through the economy, increasing the costs of manufacturing and associated wholesaling and retail operations. As operations seek to recoup their losses, price increases are expected to be passed on through the supply chain to consumers. Since supply chain disruptions, such as shipping container and other component shortages and tightness in production assets, are already causing prices to rise and pressuring profit, increased oil prices are likely to exacerbate price conditions, increasing the rate of inflation.
However, rising crude oil prices do not necessarily imply slimmer profit for everyone. Generally, during periods of high oil prices, associated petroleum-based industries, such as extraction, pipeline construction, field servicing and necessary equipment manufacturing, exhibit a boost to performance due to rising demand and strong prices.
“Oh-PEC, you didn’t!”
While the United States is the largest crude oil producing nation, it does not mean the domestic market is immune to global supply and demand conditions. The Organization of Petroleum Exporting Countries (OPEC) has significant influence over global supply and price conditions. As a result of plummeting prices in early 2020, OPEC cut total production by 10.0 million barrels per day. Since then, low supply has also compounded current increases in global crude oil prices. However, at the time of this writing, OPEC has reached a deal among its member nations to increase production and phase out further planned production cuts by September 2022. While this has enabled crude prices to ease in recent days, elevated prices are expected to continue to shock the economy and lead to further inflation.
