The Brent crude oil price declined -29% from its most recent peak of $96.55 per barrel on 9/27/23 to $69/b during the first week of December, providing stretched consumers a much-needed break in the form of falling gas prices. Even so, gas prices, which remain elevated on a historical basis, represent a significant economic threat that must be addressed.
- Slowing economic growth certainly helps to explain a recent decline in demand for both gasoline & oil (which represents 57% of the cost of gasoline). Further, historically high gas prices have prompted consumers to drive less, further lowering demand for gasoline.
- However, as indicated by the chart below, both real & nominal gas prices remain elevated on a historical basis even though 2023 prices are lower than 2022 levels.
- The notable spike in September 2023 gas prices clearly corresponds with the sharp decline in the gasoline supply during the same month as highlighted below.
- The obvious question from the chart below is: why is the U.S. gasoline supply so low compared to historic levels during a period of such economic stress?
- A simple increase in domestic gasoline refining capacity (at least to historic levels) would not just help struggling lower-income consumers, but would also help ease inflation. In turn, lower inflation would lead to lower interest rates, once again helping both consumers & the economy.
- The chart below illustrates well why we need to start our analysis of inflation by studying supply.