Inflation Is Gas Powered

FinanceStocks, Bond & Forex

  • Author David Reavill
  • Published September 12, 2022
  • Word count 953

Throughout the country this week, the focus will be on the latest release of the Consumer Price Index, our most widely viewed measure of Inflation. Wall Street believes we will get some relief from the record high Inflation earlier this year. But they expect Inflation will remain above 8%, a level not seen in two generations.

By every measure, Inflation is a plague that affects everyone. It drives the cost of living higher, robs those who save of actual returns, and causes the poor and marginal to fall even further into poverty.

A recent survey by the Pew Research Center found that 7 in 10 Americans see Inflation as our number one problem. Far above any other societal issue.

There is no question that the American people are hurting right now. To maintain their lifestyle, many are turning to credit, borrowing on those plastic cards to make ends meet. We see our incomes deteriorate by the month. Step by step, our purchasing power goes down the inflation drain. Consumer Debt continues to escalate.

What's remarkable about this current bout of Inflation is that it came out of seeming nowhere. For years, the Federal Reserve has been fighting Deflation, not Inflation. Remember the Fed talking about targeting Inflation at 2% when real Inflation was less than that?

The country's demographics caused Deflation. As the giant Baby Boom Generation retired and thus stopped producing, Inflation fell. And the Central Bank was concerned that prices might deflate. Deflation is the same problem Japan has faced for years. They, too, have an aging population and are always skirting lower, not higher, prices.

So we were in the "deflation boat" regarding prices until the current President took office. Since becoming President, Joe Biden has taken two critical steps that made Inflation inevitable.

But before we get to those two steps, let's first look at the central role that Energy plays in our economy's price structure.

In its latest statistical release, the Bureau of Labor Statistics, the folks who compute the CPI, indicated that they give Energy a weight of 22% in their calculation. Translated into English, this means that Energy is far and away the most important single contributor to Inflation. Food is the other important contributor, although not as significant as Energy. That's why they compute the overall CPI with and without food and Energy.

Put another way, there is a close correlation between energy prices and Inflation. We see this each time we fill up the car with gasoline.

When President Biden assumed office in January of 2021, gasoline prices were $2.33 per gallon. By June of this year, the cost of gasoline had doubled to $5.10 per gallon. And Inflation was more than 9%.

There were two steps that Biden took that created this situation. First, he declared an all-out war against oil and gas. During the campaign, Biden made it a priority to put oil companies out of business. As part of this move, he canceled pipelines, thus preventing that supply of oil from coming to market. Canceled and postponed oil leases on Federal Land, reducing more than a quarter of potential oil supply.

The oil industry has responded by pulling back on exploration. We currently have fewer than 600 operating oil wells in the country, a third less than we had in 2019. And gasoline production has been down 9 out of the last 12 months. Yes, gas prices are high, but exploration is too risky in today's uncertain regulatory environment.

The second major step by President Biden that sent gas prices skyrocketing was the Russian Sanctions. In reaction to Russia's Limited Military Action in Ukraine, Biden halted all oil imports from that country. These Imports represented 8 to 10% of America's total supply. As a result, America is struggling with just 90% of the oil and gas we had before the sanctions. The balance is gleaned from wildcatters and marginal suppliers around the world. And, of course, they are demanding premium prices.

Now, anytime we discuss Energy, there are always a series of ancillary issues that come along. Everything from practical conservation and environmental matters to apocalyptic panic over the world's end. Indeed, all of those concerns need to raise. And many of them have helped drive the American Energy Industry to be the safest and cleanest in the world.

But, to my way of thinking, the number one issue today is Inflation and how to curtail its destruction. Inflation is like a roaring inferno that threatens to throw this economy into recession or worse.

Before all else, we need to extinguish this Inflation-Fire. The way to do that is to roll back these draconian energy policies of the Biden Administration.

Economic News

Ministers of the European Union recommend that each member nation reduce energy consumption by 10%. In a vote held this morning and reported by the Wall Street Union, the move today is just a suggestion. By winter, the suggested reduction will rise to 15%. And, yes, today's suggestion could become mandatory if there isn't sufficient compliance.

This morning the United Kingdom reports that its GDP rose a mere 2/10 %s for the latest quarter. Economic growth was below analysts' expectations due mainly to the reduced production levels, as companies cut back on energy. Overall in the nearly two years since the Pandemic, the British economy has grown by 1.1%

Here in the US, we will get the latest Consumer Expectations for Inflation, which is expected to come slightly less than our last estimate of 6.2%. Then tomorrow will come the latest reading on inflation.

A light day for earnings as the quarter winds down. Later this afternoon, Braze Incorporated, an e-commerce support company, will report. They are followed by the headline company of the day Oracle Systems, as Larry Ellison's company is always one of the last to report results.

David Reavill writer, iconoclast, hiker. Home in the hills of Pennsylvania.

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