There’s a saying in economics that the cure for high prices is… high prices. In other words, as the price of a commodity increases, it incentivizes producers to produce more of that commodity, but the increased supply then leads to lower prices.
That’s the theory. And in general, that tends to happen frequently for commodities—like oil.
However, as our featured chart of the week above shows, although the price of crude oil has shot up more than 70% over the past year, American oil producers have been slow to increase production.
The chart shows weekly continental U.S. crude oil field production. Last week, U.S. continental producers (excluding offshore drillers) produced roughly 11.5 million barrels per day of crude oil. That’s only about 7% higher than a year ago, and as you can see on the chart, still roughly 8% below where it was before the pandemic at the end of 2019.
So, what’s going on? For one thing, inflation has increased the cost of drilling materials and labor, making it harder for producers to ramp up production. But also, uncertainty from the pandemic is to blame. You might remember that oil prices actually went negative for a brief time during the worst of the covid-related lockdowns in 2020. Now oil prices are nearing record levels. Such wild swings equal massive uncertainty for oil producers contemplating spending billions to boost production in coming years. Many have taken a pass.
As for the stock market, this means energy-related inflation could stay higher for longer, which could mean the Fed will remain aggressive with rate hikes. But it could also lead to consumer demand destruction, in which higher energy-related prices zaps demand from other parts of the economy, resulting in an economic slowdown. If that happens, inflation and growth could come down. The stock market is currently grappling with all this economic uncertainty, hence the price volatility.
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Indices mentioned are unmanaged, do not incur fees, and cannot be invested into directly.
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