Weekly Wrap: Gas Prices, Interest Rates, Crypto in Retirement Plans

Rockets and Feathers

When oil prices go up, gasoline prices follow in tandem. However, when oil prices drop, gas trickles down at a much slower rate.

The petroleum industry has a pet name for this phenomenon — rockets and feathers. The idea is that gas prices follow rising oil prices like a rocket, but float down slowly when oil prices drop.

Malarkey

President Biden called out rockets and feathers in a tweet last week.

Oil prices are decreasing, gas prices should too.

Last time oil was $96 a barrel, gas was $3.62 a gallon. Now it’s $4.31.

Oil and gas companies shouldn’t pad their profits at the expense of hardworking Americans. pic.twitter.com/uLNGleWBly

— President Biden (@POTUS) March 16, 2022

Though the president did not use the M-word, one of his staffers did.

Excuse For Slow Price Drop

Industry officials will tell you there is a good reason gas prices do not drop as fast as oil prices. They say it takes time to factor in the change.

As an example, they will tell you that a gas station may buy gasoline at a high price. If the price of oil drops dramatically the next week, the gas station has to sell off the higher priced stuff before they can buy cheaper petroleum and pass the savings to consumers.

That seems logical. However, what about the station that bought gas at a low rate and immediately raises prices at the pump when oil spikes?

Why Prices Have Changed

Two weeks ago, oil prices were climbing dramatically.

There were many reasons for escalating prices. For example, Russia’s invasion of Ukraine; OPEC’s production restrictions; and lower domestic production. As a result, the price of oil nearly reached $130 a barrel.

This week, oil dipped below $100 a barrel and is near that level now. Again, there are many reasons for the price change. These include the possibility of peace in Ukraine and a drop in Chinese consumption of oil.

China has implemented a total lock-down of major cities and industries in response to a new outbreak of Omicron. As a result, the country’s oil consumption has tanked.

Will Lower Prices Last

Oil and gas prices are only being impacted by half of the law of supply and demand. The supply has not changed markedly, but demand has declined.

Once China comes out of lock-down, demand will rise again.

Supply will have to increase for prices to stay low.

Opec is unlikely to increase production further at current prices. However, domestically, new oil rigs in production increased by 13 last week, according to Oilprice.com. In addition, the Biden administration is considering easing sanctions on Venezuela — a major oil producer.

Prices at the pump are expected to drop about 20 cents a gallon, according to one analyst.

Tom Kloza, head analyst for Oil Price Information Analysis, says the feather will drop if oil stays near $100 a barrel. However, he cautions that the drop is likely to rocket up again when China returns to normal and U. S. workers start to return to work at the office.

Inflation, Recession, Stagflation – Pick a Lane

The Federal Reserve’s quarter of a point hike in interest rates Wednesday gave heart to those who felt the Fed has been too slow to react to rising inflation. However, the projection of six more hikes this year and another three in 2023 raises concerns.

Fed Fighting Inflation

The Fed’s stated goal in raising rates is to fight rising inflation. However, if the central bank applies the brakes too hard, the economy could slip into recession or stagflation

A recession is defined by slow or negative growth and high unemployment. Stagflation is a recession with a dose of high inflation.

Strong Economy

Speculation about recession and stagnation abounds. However, Fed officials exude confidence both those events can be avoided.

The counterweights to recession and stagnation, according to Fed members, are a strong economy and the central bank’s flexibility. New York Federal Reserve Bank President John Williams made that point the day after the rate hike.

“The economy is coming into this with a lot of forwarding momentum,” Williams said during a virtual event organized by the Council for Economic Education. “It’s definitely not a stagflation issue.”

Williams said he expects inflation to ease later this year. However, he notes the Fed has the capacity to impact inflation with more rate hikes.

“We have the ability to adjust interest rates higher,” said Williams. “If inflation ends up being much more persistent or staying much higher than we expect or want.”

How We Got Here

It’s the P-word.

When the pandemic hit, the economy reeled. Stores and restaurants were without customers. Commerce slowed dramatically.

The Fed responded with a drop in interest rates to almost zero. This was a move to encourage spending and business borrowing. In addition, the Fed revved up its printing presses injecting trillions of dollars into the economy.

Fed action along with increased federal spending bolstered a quick economic recovery. However, such rapid growth has led to inflation.

What It Means For You

The primary impact of the rate hike on you and me is that it will cost more to borrow money. Conversely, money languishing in low-interest investments, such as savings accounts, C.D.s, and money markets will earn more.

Road Ahead

The Fed’s raising of rates is an attack on inflation. However, there are risks in such a move.

Higher interest rates may restrict borrowing.

For consumers, that means it will be harder to buy a house, car, or any other items purchased with a loan.

Businesses will also find it harder to finance investments. If it becomes too hard to borrow, businesses may have to restrict growth and limit hiring. As a result, the economy could slow and unemployment could rise.

Wild Cards

War, oil, and the supply chain are wild cards influencing inflation. All are outside the Fed’s control.

A sudden peace in Ukraine, a sustained decline in oil prices, or the unsnarling of the supply chain could all ease inflation. As a result, the Fed has to be nimble enough to respond to changing economic forces in applying future rate increases.

401(k) Crypto Concerns

The United States Department of Labor has cautioned plan managers and businesses that cryptocurrencies are not suited for 401(k) plans. Further, the department announced it intends to investigate plans offering crypto and related investments.

“At this early stage in the history of cryptocurrencies, the Department has serious concerns about the prudence of a fiduciary’s decision to expose a 401(k) plan’s participants to direct investments in cryptocurrencies, or other products whose value is tied to cryptocurrencies,” said a department release.

Risks to Retirement Plans

The department cited several risks inherent in putting cryptocurrencies in retirement accounts. Chief among those is volatility.

Specifically, the department cites price fluctuations and “fictitious trading reported, widely published incidents of theft and fraud.”

In addition, Labor says record-keeping and valuations are difficult to maintain.

Regulation

A changing regulatory environment is another concern for crypto investment, according to Labor.

The Labor announcement came last week just a day after President Biden signed an executive order directing the federal government to develop plans for regulating cryptocurrencies.

Coordinated Plan

The executive order authorizes the exploration of developing a central bank currency. In other words, a digital dollar.

Brian Deese, the director of the National Economic Council, and Jake Sullivan, the president’s national security advisor, issued a joint statement outlining the intent of the order.

“This E.O. marks an intensification of our efforts to promote responsible innovation in the digital assets space – an innovation that works for all Americans, protects our national security interests, and contributes to our economic competitiveness and growth,” reads the statement. “Fundamentally, an American approach to digital assets is one that encourages innovation but mitigates the risks to consumers, investors, and businesses, broader financial stability, and the environment.”

It could be that federal regulation will provide the stabilization in cryptocurrencies Labor wants. In the meantime, retirement plans are being warned away from decentralized finance.

Read More

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Max Erkiletian

Max K. Erkiletian began writing for newspapers while still in high school. He went on to become an award-winning journalist and co-founder of the print magazine Free Bird. He has written for a wide range of regional and national publications as well as many on-line publications. That has afforded him the opportunity to interview a variety of prominent figures from former Chairman of the Federal Reserve Bank Paul Volker to Blues musicians Muddy Waters and B. B. King. Max lives in Springfield, MO with his wife Karen and their cat – Pudge. He spends as much time as possible with his kids, grandchildren, and great-grandchildren.