What does the Fed’s 75-point increase mean for inflation and energy?
The Fed's decision to do a 75-point increase was like placing a bet in Vegas. The house always wins; in this case, the house is inflation.
The Fed's policies have been way behind the inflation curve, with the administration even calling it "transitory." Although they have slowly backtracked that storyline, we can all see that it is not transitory.
I think energy will be critical to keeping us from the Jimmy Carter inflation nation. However, President Carter did not have the 20 years of bad "Greener" energy policies exacerbating the problem.
Jerome Powell said that "The events of the last few months have raised the degree of difficulty" of getting that soft landing... There is a much bigger chance now that it will depend on factors that we don't control. Fluctuations and spikes in commodity prices could wind up taking that option out of our hands."
This statement is essential to note from Chairman Powell. Energy is the single biggest commodity in the world, and fossil fuels are over 79% of the energy source in the United States. You can see from the chart below from the EIA that renewables only account for 12%, and the cost to the consumer is incredibly higher.
The IEA released the monthly world oil and natural gas production report this week. Of the production of crude oil, NGL, and feedstocks gains in the Americas, the United States was 86% of the increased output. Another point from the report is that the refined output in gasoline and diesel was four percent YOY. Four percent is not enough to keep up with demand, or even the demand destruction due to inflation.
The Bottom Line
We are going into a recession, but officially we are only there when we finish our 2nd quarter of negative growth. Markets don't like recessions, and investors flock to commodities for portfolio survival.
Although the pricing formulas have become more complex over the years, one thing is sure: if the supply can not increase, there will be price increases.
"There is little hope that the undersupply will ease in the near future given strong demand growth and constrained refinery output," the IEA said. The forecast for future refining processing is "not sufficient to fully meet middle distillates demand in 2022 or in 2023."
Unfortunately, we will probably see higher gas and diesel prices. How high depends on the demand destruction. Data points to the possibility of $10 gasoline and $14 diesel until further demand destruction kicks in. And when diesel hits all-time highs, it will have a tremendous negative impact due to the shipping and large transportation industry relying on it.
The only thing you can worry about is the things you can control. Your financial future is based on your portfolio.
As always, check with your CPA if alternative investments are good for your portfolio
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Please reach out to our team at any time for answers to your questions. Jay R. Young, CEO, King Operating
ForbesBooks Author of "The Upside of Investing in Oil and Gas"