March 09, 2022
☕️ Good morning to all who observe! Grab your coffee, make your toast. We're all about fueling up today — lots of energy talk coming your way.
📅 Join Axios' Neil Irwin and Alexi McCammond today at 12:30pm ET for a virtual event exploring the origins and impacts of the rising cost of living. Guests include White House Council of Economic Advisers member Heather Boushey and UC Berkeley professor Robert Reich. Register.
Today's newsletter is 1,127 words, 4.5 minutes.
1 big thing: The U.S. oil spigot
The U.S. and U.K. decisions yesterday to ban Russian energy imports sent oil prices surging yet again, Axios' Kate Marino writes.
Why it matters: The oil import ban will help choke off a little of Russia’s main source of revenue, but here at home the soaring prices will also filter down to the cost of gasoline and consumer goods.
- Prices' steady march higher has led to louder calls by some for the U.S. to quickly ramp up domestic oil drilling — but that's easier said than done.
By the numbers: The 519 active U.S. oil rigs mark a huge jump from the depths of the pandemic — but the count is still at just 60% of its 2019 peak.
The big picture: The U.S. is effectively energy independent, meaning that it produces about as much oil as it consumes, as my colleague Neil Irwin reported.
- About 3% of U.S. imports of oil come from Russia (8% including all petroleum products) — and while that’s not a ton, there’s still a knock-on effect in world markets.
- “Although the impact [of the ban] on U.S. supply may be limited, prices are soaring because the ban makes it more of a challenge to trade in Russian oil and more likely that other countries may follow suit,” wrote Rystad Energy's head of oil markets, Bjørnar Tonhaugen, in a note.
Meanwhile, someone has to replace those lost imports and fill the gap in demand. President Biden has appealed to OPEC, the group of largely Middle East oil-producing countries, to start raising production — so far to no avail.
But, but, but: Why doesn’t the U.S. just drill more oil? The answer comes down to “discipline,” an industry buzzword that means companies don’t just turn on the spigot full force every time prices go up.
- Producers have gotten a lot more cautious, thanks to recent waves of bankruptcies that came after some took on high levels of debt to fund exploration and production.
- Investors in recent years have demanded more focus on dividends and steady shareholder returns — rather than big, risky bets on growth that won't pay off if prices head south again.
And then there's the supply chain.
- Occidental Petroleum CEO Vicki Hollub said yesterday that a lack of materials, skilled labor and other supply chain troubles significantly limit U.S. shale producers' ability to jack production back up, Reuters reports.
What to watch: U.S. oil ended yesterday at around $124 a barrel. If Europe joins the U.S. in a complete ban on energy imports from Russia, research firm Capital Economics estimates that prices could "easily" settle at $150 in the coming months.
Editor’s note: This story has been corrected to state that Capital Economics (not Rystad) estimates oil could hit $150.
2. Catch up quick
3. Gasoline surges
Just as the West is pulling back from buying Russian oil, retail gasoline prices are hitting new nominal highs for the first time since July 2008, Matt writes.
Driving the news: The latest numbers from the Energy Information Administration pegged the average cost of a gallon of regular at $4.10, up 25% from the end of last year.
Why it matters: This will help keep U.S. inflation uncomfortably high for the foreseeable future.
- Yes, but: If you adjust for inflation over time — meaning account for the declining buying power of the dollar — the true record high for U.S. gas prices was in June 2008, when a gallon cost roughly $5.50 in today's money.
4. Why there's a child care worker shortage
"We're competing with McDonald's, a half-mile up the street," said Meredith Burton, the director of a small child care center in Greenville, South Carolina. It took her all year to fill a part-time position that doesn't pay quite as well as fast food, she tells Emily.
Why it matters: There's a shortage of child care workers in the U.S., largely because the pay is so low — and workers can find now find higher wages in fast food and retail.
- The shortage is holding back parents, particularly women, from the labor market, where participation is still not back to pre-2020 levels. (A dose of reality to drop into the conversation around Women's History Month.)
Details: In February, 7,900 new jobs were added to the child care sector, according to the latest jobs report. That's nowhere near enough to get back to pre-pandemic levels.
- For years, providers have kept the cost of child care relatively low by paying workers (overwhelmingly women) as little as possible. Before the pandemic, the average hourly wage for a child care worker was about $11.
- Thanks to a huge infusion of cash from the American Rescue Plan, providers have been able to raise pay a bit, but it hasn't been on par with the kinds of wage increases happening at private companies or even public schools, said Lauren Hogan, director at the National Association for Education of Young Children.
- "I just talked to [a child care provider] in Arkansas where Target is paying $24 an hour. They can't compete with that."
- "This is a market failure that needs a public solution," she said.
Burton said she's had an easier time finding full-time teachers for her child care center because they're salaried — but those teachers could easily get a $10,000 raise for taking a job at a public school.
- Right now she's managing a long customer waiting list, like many other centers around the country.
5. Charted: 🔧 Financial plumbing under stress
The cost that financial firms pay for relatively short-term borrowings in the U.S. commercial paper market shot up sharply in the last few days, Matt writes.
Why it matters: This is a sign that the lenders who provide credit — the lifeblood of the financial system — are getting a bit jittery.
- The concern is that other financial firms could suffer losses as a result of fallout from Russia's invasion of Ukraine, and the sanctions imposed in response.
State of play: Many lenders have decided they want to extend credit on a much shorter term, say, just overnight rather than over a few months.
- "We have a crisis of sorts unfolding, and in a crisis, like in 2008, everyone lends at short maturities," wrote Zoltan Pozsar, an analyst at Credit Suisse, who covers these short-term credit markets.
What we're watching: Whether financial markets start to single out and stigmatize certain banks they believe may be hurt especially badly by the effects of Russia's invasion and subsequent sanctions.
The bottom line: The events of the last two weeks represent a massive shock to the global financial and economic systems. So far, the financial system has held up fairly well, but we're seeing signs of strain.