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Oil Prices Highest in 8 Years Fuel Inflation Concerns, Where to From Here?

The average Joe on the street is very concerned about inflation. But what can the Fed or President Biden do about it?
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Current, June, and December Oil Futures from Barchart.Com. annotations by Mish 

Current, June, and December Oil Futures from Barchart.Com. annotations by Mish 

Price Declines Coming?

Oil is in a state of severe backwardation. That means price is higher now than in the future. 

  • Current Price: $109.49
  • June Price: $100.94
  • December Price: $86.15

The spot price now is $109.49 for immediate delivery but one can lock in a price for December delivery right now at $86.15.

That's an expected decline of $21.34 per barrel in December. 

Good News?

Not necessarily. At the beginning of the year the December price was bout $65 per barrel. One could have locked in that price then, not now. 

But if prices do fall, is that good news?

Again, not necessarily. It depends on why and how.

If prices decline because supply constraints in Russia ease that's one thing. If the price declines because demand falls off the cliff due to a recession, that's another matter.

Long Term Oil Chart

Chart courtesy of StockCharts.Com.

Chart courtesy of StockCharts.Com.

The price of crude is the highest since 2014.

What Can and Can't the Fed Do?

  • The Fed can neither print nor produce oil. 
  • It can reduce demand by causing a recession. 
  • The Fed can speed up a recession on purpose or accidentally. 

The Fed is not really in control. There is little the Fed can do to stop a recession. The Fed can goose or slow a trend, not change it.

Cause of Current Inflation

Real Income and Spending data from the BEA, chart by Mish

Real Income and Spending data from the BEA, chart by Mish

The three rounds of fiscal stimulus, one under Trump and two by Biden are clearly visible in the above chart. 

Unlike QE, those represent genuine "helicopter drop" stimulus. 

Real Personal Income Declines for the 8th Time in 9 Months

For discussion of the above chart, please see Real Personal Income Declines for the 8th Time in 9 Months

In addition to the helicopter drops, Biden extended rent eviction moratoriums  far too long, putting still more money in people's pockets. 

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Factor in supply chain disruptions and a shift in consumers preferences towards goods away from services and there's your inflation.

Via QE, especially housing stimulus, the Fed certainly threw more fat on the fire.

What Can Biden Do?

Unfortunately, the president is hell bent on making matters worse. He reaffirmed Build Back Better in his State of the Union address last night.

For details, please see Biden's State of the Union Another Futile Plug for Build Back Better

Don't look for the president to do anything useful. Instead, be thankful Senator Joe Manchin is still firm against Biden's inflationary plans.

At the start of February, Manchin told reporters the president's plan was dead, adding that he had not discussed the legislation since December.

He said: "What Build Back Better bill? I don't know what you guys are talking about. It's dead."

And last night Manchin sat with the Republicans.  

Oil Reserve Policy Error

Last night, Biden pledged to bring down oil prices by releasing oil reserves.

Whoop de doo!

That's about two days supply. At best it won't do a damn thing. At worst we should be saving oil in case we really do need it. 

It's another poor policy decision meant to look good but isn't.

Look Outside the US

For those who wish to ignore geopolitical consequences, here's an item I certainly agree with.

Consumer discretionary is the last place to be. In general, think gold, commodities,  and outside the US. 

This post originated on MishTalk.Com.

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