Gas price fluctuations are 'a function of capitalism': Strategist

St. Paul Research Chief Market Strategist Alan Knuckman explains the volatility in gas prices indicating a three-week decline, oil companies adjusting their pricing, and commodity prices amid inflation and the current economic environment.

Video transcript

- All right. Oil prices plummeting to start the week. WTI Crude sliding more than 8%. Brent Crude down roughly 7%. Well, energy markets continue to cool. And how much relief will consumers actually see at the gas pump? Alan Knuckman is the chief market strategist at St. Paul Research. Alan, good to see you. Thanks for being here with us.

ALAN KNUCKMAN: Thank you.

- What is driving prices down? Do you expect the slide to continue throughout the summer?

ALAN KNUCKMAN: Well, I think we're getting to the absolute intended consequences that the Fed was looking for. So they wanted to knock energy prices down and tame inflation. And so we've had a nice little smack right back to the breakout point. If you remember March, April, and May, crude oil traded sideways between 90 and 110. So now we're back to that 100 breakout. So that'll be interesting to see where we go from here. But this is all about the dollar. So the dollar spike obviously is intended to help quell inflation because a dollar drive sends gold and crude on a dive. And this is exactly what they intended. And that's what you're seeing in the price today.

- And of course, oil markets tend to be forward looking. So a lot of people are wondering, when are we going to see that correlate then with gas prices with what people are paying at the pump?

ALAN KNUCKMAN: Well, that's the million question because they are absolutely not correlated. So we had traded around $100 a barrel level from 2011 to 2014, again in 2017. But gas prices were nowhere near where they are now. So it's a function of capitalism. Oil companies are doing what they're doing. They're maximizing their profits. And therefore, we're paying at the pump. Now, if you adjust the price of crude oil for inflation, that record high that we saw in 2008 would have to get to about $200 a barrel to be equivalent if you adjust for 3% inflation a year.

But there's good news on the horizon in the fact that it looks like the dollar may top out and the fact that interest rates are going to top out here at about 3 and 1/2% in 2022. But then they start to decline. '23, they're at 2 and 1/2%. '23, they're at 3%. So that looks like the near-term peak for the tightening cycle. And if you look further out all the way out to 2030, rates are still extremely, extremely low around the 3% level.

- So are you seeing demand destruction given the price of the pump, which is $4.80 nationally today, and has it peaked, the price of gas?

ALAN KNUCKMAN: I don't think so. Again, let's just talk about what we see around us. And there are people that are going to maximize the situation. And now they have pricing power. Most Americans, the economic problem that we're seeing right now is that there are too many jobs and not enough people. Now, that's not usually a financial crisis. People are looking for that to flip over and cause a recession and people to lose their jobs. But if you go back to 1973, '74, '75, the unemployment rate was 8%. We're at less than half of that right now. So I don't see that causing any economic catastrophe. But we might see prices back off a bit. People have more money than they've had in years. And you look at the wage inflation we've seen over the last three to five years, people have money, and people can get jobs. That's the reality.

- And by some estimates, we had GasBuddy's Patrick De Haan saying that if oil holds at these current prices, we could see gas prices drop $0.30 per gallon in the coming weeks. And of course, we are seeing demand destruction starting to creep in a little bit there. How hopeful are you in terms of the short-term relief that people might see soon?

ALAN KNUCKMAN: I am still very positive on the price of oil companies. I think the way to best benefit it is to take advantage of their profitability and being able to invest in their success. As far as the price of gasoline, there's too many variables. And like I said, pricing power is not just for the oil companies. It's across the board. Your Coke has doubled in value. My iced tea went from $1 to $2. People are able to pay. And that's just the reality that we had the most people drive on the holiday weekend that we've had in history.

So I don't think an extra $0.20 more, $0.30 less-- it's something that people complain about. But the reality is, I don't think they act on it. And I think that the oil companies and the refiners and all the producers are going to still benefit from the situation because it is what it is. And people need gas for their cars.

- And I got to ask you about what I'm calling the sequel of the summer, which is Bezos v. Biden back and forth about the price of gas. And of course, the President suggesting those oil companies, and even gas stations, should bring down the prices. What's your takeaway from that dust up? And is there anything the administration can do that would be effective?

ALAN KNUCKMAN: No, they can't. But people don't realize that they want the President to do something, but they don't understand. This is capitalism. This is what it is. The oil companies didn't invest anything in CapEx for three to five years because oil prices, if you don't remember went negative, two years ago. So people were saying we'd never get back to about $30 a barrel. So they never invested. And they don't really care because they're getting such high prices. Their profitability is at epic records. So the answer is no. Capitalism is where it's at. And until the cure for higher prices when they drill more, they find more, and they produce more, all right now, that'll bring prices down.

- And it's interesting because when you look at what OPEC and OPEC Plus are saying, they're like, look, we are producing as much as we possibly can. Is there any sort of outside reinforcement or help that's actually going to help the US market right now?

ALAN KNUCKMAN: No, I don't think so. I've been a commodities guy for more than 30 years. And this is how it goes. I mean, the cure for high prices are a high price and the cure for low prices are low prices. It's pure supply and demand. And, eventually, this will catch up. People will find alternatives. I mean, just look at something like lumber. Lumber prices went from $400 up to $1,500. Now they're back down to $400. They found alternatives. They found solutions.

But it is what it is. Crude is more of a global, how shall we say, a gentleman's club that has a little bit better pulse on supply and demand as far as what they can put out there. So they have a little bit better pricing than a free market. And so that's what you get when you don't have an absolute free market and you've got the capitalism. No one can tell an oil company what to do. They do what they do. And they make what they make.

- And there you have it. Always great to see you. Alan Knuckman there, St. Paul Research Chief market strategist. Thank you so much.