OPEC+ ,which is the 13 original OPEC countries plus 10 more countries including Russia and Canada, has just announced it will reduce oil production. The goal is to see oil prices increase to near $100 per barrel. The result of this action will be higher inflation in the U.S. and worldwide. Because of Biden administrations restrictions on U.S. oil production, there is little that can be done.
By the middle of the prior administration’s term, the U.S. had become energy independent. The U.S. was the largest producer of oil in the world, pumping out 12.5 million barrels per day (bpd). But the Biden administration sought to reduce energy production both in the short term and, more importantly to them, in the long term.
Because the Biden administration wants an energy policy that will reduce domestic production and embraces huge government budget deficits, inflation will rise.
Biden canceled the Keystone pipeline, made the permitting process more difficult, withdrew existing permits to drill on federal lands and convinced banks to reduce lending to the oil industry because there was no future for oil production.
The result was U.S. production dropped to 11 million bpd. With that reduction in supply, gasoline prices rose from about $2.25 per gallon up to $5 per gallon by mid-2022. Then, mostly because China shut down its entire economy to pursue a zero-COVID policy, which dramatically reduced worldwide energy demand, gasoline prices fell to about $3.20 per gallon by the end of 2022.
As China re-opened its economy, oil prices rose. Currently, the price of gas is about $3.50 per gallon. With the OPEC+ decision to reduce supply further, gasoline prices are headed toward $4.50 per gallon.
In June 2022, at the same time, gas prices peaked, the U.S. annual inflation rate reached 9.1%. Because of the falling energy prices, and a restrictive monetary policy, U.S. inflation fell to 6% by early 2023. But because the Federal Reserve was reluctant to raise interest rates high enough so that real intertest rates would be positive, inflation was slow to fall further.
The inflation problem could have been avoided. Instead, it will now be very painful to reduce inflation. Inflation must be reduced as soon as possible because, as Fed Chair Jerome Powell recently said, “Without price stability, the economy does not work for anyone.”
As I have noted in numerous prior columns, the inflation that we have today is a result of excess demand created from 1.) the Federal Reserve’s shockingly irresponsible monetary policy in 2021, and 2.) by the Federal government spending $9 trillion more than it received in tax revenue in fiscal years 2020, 2021, 2022 and 2023.
In 2021, the Fed kept interest rates near zero and vastly increased the money supply. This expansionary monetary policy overstimulated an economy that was growing at a 6% annual rate. The expansionary monetary policy worsened inflation.
Finally, in June 2022, the Fed remembered that price stability should be the top priority for monetary policy. By then, the 9.1% annual inflation rate caused the Fed to raise interest rates dramatically. Rates were raised by 75 basis points in the Fed’s next four meetings. Strangely though, the Fed decided to ease up. Rates were raised by only 50 basis points in December and then by only 25 basis points in February and March.
As noted in prior columns, the Fed eased up way too soon. And now with higher energy prices on the horizon, the Fed will be forced to act much more aggressively.
Because the Biden administration wants an energy policy that will reduce domestic production, inflation will rise. Since the Biden Administration wants to continue to run huge government budget deficits, inflation will rise. Since the Federal Reserve refuses to raise interest rates above the inflation rate, inflation will rise.
Let’s hope the Fed gets more aggressive with interest rate hikes before inflation reaches double-digit levels. Let’s hope the Biden administration relaxes oil production restrictions to encourage more production. And let’s hope the Federal government stops all of this needless deficit spending.
Let’s hope inflation can be brought down.
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