Q&A of the Day – The Inflation Impact of Oil
Each day I feature a listener question sent by one of these methods.
Email: brianmudd@iheartmedia.com
Social: @brianmuddradio
iHeartRadio: Use the Talkback feature – the microphone button on our station page in the iHeart app.
Today’s entry: Submitted via talkback: Hey, Brian, hey Joel, love the show as always. Uh, quick question, when we look at the price of gasoline and its historic low numbers, uh, my question is, why does that defy logic with inflation when you compare it to other areas of the market?
Bottom Line: It’s a great question. My recent analysis on this topic included this... The price of oil on President Trump’s first day back in office was $78 per barrel. What this means is that his policies have led to a 27% price decrease in the single most important commodity. And as you’re starting to see the effects at the pump, the impact will soon begin to be felt at the manufacturing and wholesale level in addition to the immediate impact within the transportation sector. So about that in addressing today’s question regarding the seeming disconnect between the price of oil/gas to the costs of other goods.
The first explanation is going to be the most obvious. The price of oil is obviously most directly related to the price of gasoline as 52% of the cost of gas is directly a result of the cost of the commodity itself. Additionally, about another 15% of the cost is related to the transportation of gas, which is also directly influenced by fuel costs. Also, in addition to gas having the most direct price impact from oil of any consumer good, the turnaround time weighs in heavily as well.
From the time a barrel of domestic oil is purchased for delivery, the typical turnaround time for delivery as gasoline in gas stations is only about 14 days (and can happen in as few as ten days). So, for example, the gas you buy today was refined from oil that was purchased at about $60 per barrel two weeks ago (after a two-day rally oil is back above $58 most recently). The benefit in other aspects of the supply chain can take much longer to see.
Here’s an idea of the supply chain implications...
The manufacturing date of an average item on a store shelf varies widely depending on the product type, supply chain, and shelf life. Here’s a breakdown based on common categories:
- Non-perishable goods (canned foods, dry goods, etc.): Typically manufactured 6 months to 2 years before reaching the shelf.
- Perishable goods (dairy, bread, etc.): Usually made days to two weeks before. Milk might be bottled 1–2 weeks before, while bread could be baked 1–3 days prior.
- Packaged snacks (chips, cookies, etc.): Often manufactured 1–6 months before, with shelf lives of 6–12 months.
- Electronics or durable goods (small appliances): Could be made 6 months to 2 years before, depending on production cycles and inventory turnover.
- Clothing or textiles: Often produced 3–18 months before, as fashion seasons drive production schedules
Therefore, it takes a while for the impact of energy costs to be felt when you’re buying stuff at the store, at least this side of the perishable goods – although the direct impact on them by energy costs is also lower. This means that the only immediacy for most things you buy in the store comes from potential relief in transportation costs. Although transportation costs typically make up about 3% of the cost for what you buy in the store...and immediate relief is only seen by the transportation companies.
Most distribution/transportation contracts are agreed to over longer terms, usually a minimum of six months at a time and often for 1–3-year terms. Currently, about 65% of all consumer goods are transported via contracts that are over 1-year in length. This breakout shows how “sticky” higher energy prices can be. At the same time, if sustained at lower levels, it shows what the future could be.
If we can hold the price of oil near $57, it’s an annualized savings of about $2,500 for the average household over the $78 oil that President Trump inherited. The relief at the pump is quick. The relief in other aspects of the economy obviously isn’t.