What The Elections Might Mean For Commodity Prices, Especially Oil

The Federal Reserve is doing its part to stifle inflation by crimping demand, but policy changes that encourage supply could help subdue inflation just as effectively, and with a lot less pain.

Commodity prices are ruled by supply and demand. When demand for a commodity is high and supply of that commodity cannot rise fast enough to meet the increased demand, prices rise. A good example is what happened to oil prices – which affect the price of just about everything one way or another – in the post-COVID, post-2020 election regime change cycle here in the U.S.

As the global economy emerged from pandemic lockdowns the demand for oil naturally increased, supply could not keep up with the sudden surge in demand. Oil prices rose. The price rise in oil helped fuel an already rising rate of inflation that had been set in motion by trillions of dollars of COVID stimulus money pumped into the economy by both the Federal reserve and Congress. The Feds injected liquidity into the the financial system and lawmakers literally dumped money into consumer and business bank accounts. The result was a nearly instantaneous realization of the classic definition of inflation taught in Econ 101: “Too much money chasing too few goods.”

Right now, the Federal Reserve is doing its part to take care of the “Too much money…” side of the inflation equation by raising interest rates and reducing its balance sheet in order to reduce liquidity in the financial system. These actions should, over time, cause enough pain to businesses and consumers so that the demand for everything, including oil and other commodities will go down, and inflation will subside. It’s a time-tested but uncomfortable solution to the inflation problem.

In the world of commodities, the “…too few goods” part of the inflation equation would ordinarily be solved by high prices themselves, because higher commodity prices are the best incentive for commodity producers to increase production. Increased production means increased supply, and increased supply is also a time tested and very effective way to tame commodity inflation. Simply put, production increases raise supply and decrease prices. Inflation goes down and consumers benefit without pain.

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However, things have been anything but ordinary the past few years, and the normal cycle of high-prices-getting-rid-of-high-prices, especially in the oil markets, has been disrupted here in the U.S.

Unfortunately, just as demand for oil rocketed in the post COVID economic recovery, the oil industry came under attack by the Biden administration. What should have been a brief surge in oil prices offset relatively quickly by a corresponding surge in oil production has become a bit of a quagmire. Oil producers have been politically disincentivized to invest in exploration at a time when they should be given every incentive to increase investments in oil and gas exploration. Political and social pressures are overriding the profit motive provided by currently high oil prices. This is bad news for consumers and for the Federal Reserve. Consumers will see no relief from high prices, and the Fed’s inflation fighting efforts will be made all the more difficult because the supply side of the inflation equation has been robbed of its normal balancing solution by restrictive policy signals coming out of Washington.

Politicians make policy, and the current policies promulgated by the Biden Administration and its allies have not been conducive to promoting increased commodity production, most especially oil. Things need to change in order to increase supplies, and in America, change comes at the ballot box. Commodity producers will be watching to see what signal is sent to Washington by the electorate; perhaps that signal will be one that loosens the current negative attitude towards fossil fuel extraction and commodity production in general. If so, increased commodity supplies, and some inflation relief, could be on the horizon.

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