Concern that the United States is sliding into a recession has jolted oil traders after the Federal Reserve’s historic rate increase last week.
Crude oil was trading around $110 per barrel in the U.S. market on June 20, down from more than $117 on June 16 and around $123 two days prior. The slump has begun to translate into slightly lower prices at the gas pump with a gallon of regular gas dropping to an average of $4.98 after hovering above the $5 mark since mid-June.
The modest decrease indicates that traders are still confident in robust oil demand despite the Fed raising rates by 0.75 percent on June 15, the sharpest increase in more than two decades. The Fed is in the process of raising interest rates this year in order to tighten credit and thus the money supply. Inflation was up 8.6 percent year-over-year in May after the central bank printed trillions of dollars to pay for government spending packages during the COVID-19 pandemic.
Oil has been on an upswing for more than a year, feeding off a demand bounce-back from economy lockdowns instituted during the pandemic as well as supply throttled by anti-fossil-fuel policies of the U.S. administration.
The near-doubling of the price of gasoline compared to late 2019 has squeezed the home budgets of Americans as the economy sputters under the weight of inflation.
The Biden administration has blamed the high gas prices on the Russia–Ukraine war and an unwillingness of the oil industry to increase production. Experts who spoke to The Epoch Times, however, laid the blame primarily at the Biden administration’s feet.
“It’s not the war in Ukraine. It’s really domestically caused constraint on the supply side,” said Ross McKitrick, a professor of economics at the University of Guelph in Ontario and expert on energy and environmental policy.
Sanctions imposed on Russia in response to its invasion of Ukraine earlier this year have forced Russia to sell its oil at a discount of about 30 percent, giving a competitive advantage to businesses in China and India that are still buying it, McKitrick noted.
Even if there was more oil in the market, gasoline supply would still be limited by U.S. refinery capacity, which has decreased in recent years as operators anticipate the Biden administration’s gradual killing off of the industry as a part of its plan to “decarbonize” the economy.
These policies have rendered oil companies unwilling to invest in refinery capacity because “it’s so risky now and it’s so likely to fail,” McKitrick said.
“No one has built a new oil refinery in the U.S. for decades,” he said. “Nobody’s willing to invest in expanding refinery capacity because the outlook from everything that the government has said is you won’t get the approvals.”
Supply constraints thus leave Americans with the prospect of facing high gas prices even as a recession sets in. The economy would have to seriously tank to send oil speculators fleeing and oil prices plummeting, according to several experts. Even then, they would expect the price to climb back up.