Refining Capacity Not Oil Supply Is Driving the Energy Price Spike

SPEAKER_1 (0:00)

Do you want to broaden things out, though? Take a look at this down day we're seeing in the recent activity. Bring in Ed Siddell, CEO and Chief Investment Advisor at EGSI Financial. Ed, great to have you on the show.

And what a day here. We've got a fully down market. We're PMI in focus this morning because of the prices. We're having more conversations about inflation. I'm looking at oil right now, about $91.24.

But let's talk about these gas prices and specifically these diesel prices, because we're still at record highs with diesel. We've got Americans really feeling the pinch at the pump when it comes to filling up your tank. Are you viewing this still as a potential short-term or transitory impact, or are we starting to see a point where energy is really going to play into broader inflation?

Ed Siddell (0:46)

Well, thanks for having me back. And, you know, I think we're really at a tipping point right now. I don't think it's so much of a production problem as it is a refinement problem. Once we get the refineries up and running, you know, honestly, it's an affordability issue all the way across the board. Because we are a petroleum-based society, it's affecting everything. But I do believe that it is going to be short-term, no matter what happens in Iran, because there was an analyst from JP Morgan that said that, you know, there's about 17 million barrels going through the Strait of Jumeus each and every day now, which is at a six-month high. So it's not that the oil is not getting through, we're just not able to refine it and get it to the gas pumps. And diesel is a huge issue. So for us, our target has always been about $7.

Once we see it, the national average hits $7, then we really need to start taking a second look at, okay, are we on the road to a recession? Because once we get closer to $8, we're gonna start to see it impact businesses all the way across the board. But honestly, we don't see that right now. We see it more as a short term issue. And I think the feds are looking at it the same way as well.

SPEAKER_1 (1:57)

And so before we talk about that $7 threshold, I wanna dive into this refining issue. If the oil prices issue is really more of a refinement problem, Ed, than a product problem, what's happening here that's driving this? What specifically are you focusing on to determine if we're going to hit and then stay above that $7 threshold?

Ed Siddell (2:18)

Well, we need to double the refinement. We need to get the refineries that were closed back open again and running.

And I think we're actually on the road to doing that right now. That's gonna be the biggest issue. So as soon as the refineries start running again, or there's news of the refinement starting to increase production, going to the gas pumps, we're gonna start to see those gas prices and diesel prices come down. But if we don't, and everything kind of holds steady, then all of a sudden we're gonna start to see diesel prices on the national average go up, and then that's where we're gonna be in trouble.

SPEAKER_1 (2:54)

So if that happens, Ed, let's run through the hypothetical. I mean, how quickly do we see that trickle down? We already know that we're seeing it in trucking and shipping and elevated costs. We already know it's affecting airlines because jet fuel is more expensive. When do we start to see it trickle down more to the average American consumer?

Ed Siddell (3:15)

It's gonna be 90 to 120 days before we really start to see a significant impact down to the levels that we were used to before. I mean, it's parabolic on the way up. As soon as oil broke $100, we saw the price of the pumps skyrocket 50, 60, 70 cents a gallon.

And even though oil has come down, it's really the price of the pumps hasn't yet. So it's adverse to what people are paying on every time they go to the gas station. So we're probably going to see about 90 to 120 day lag before we really start to see a significant impact.

SPEAKER_1 (3:52)

Yeah, I mean, we're referencing right now the rocket and feather effect. Right now, it comes to gas. As you said, they skyrocket really fast, but the gas prices themselves take anywhere weeks to months to moderate back down, even as we see the price of oil go down much faster. So, Ed, then, how do we read what's happening in the broader economy? And if we are starting to see improvement, if we can't use those metrics and sentiment stays low because people are still feeling that same level of pain every time they're going to the gas station?