Fuel price pressures 'likely to remain elevated,' Fed economist tells Albuquerque leaders

Gas prices surged across the nation this month, and relief could take some time.

That was one of several points Nicholas Sly — vice president and Denver Branch executive for the Federal Reserve Bank of Kansas City — made during a presentation to business leaders at Economic Forum of Albuquerque on Wednesday.

Sly helps the Fed monitor economic conditions across the Tenth Federal Reserve District, which includes Colorado, Kansas, Nebraska, Wyoming, western Missouri and northern New Mexico.

The state average for a gallon of regular gasoline on Wednesday stood at $4.47, up 41 cents from a month ago and nearly $2 from a year ago, according to AAA New Mexico. The average for Albuquerque was about the same at $4.46. Diesel also hit its highest recorded average price this month at $6.36 per gallon.

Gas prices are up as the United States' ongoing conflict in Iran persists. But that's not the whole picture, Sly said. Pump prices are also collectively being shaped by low oil supply pushing oil prices up and a growing refining problem.

"There's refining activities that have to take place. (When you have oil,) you have to then process that into gasoline, further process it into diesel fuel," Sly said.

Because refining is a "costly endeavor" and refineries are operating at maximum capacity, refining margins are growing. That is increasing what's known as the crack spread — the price difference between crude oil and its refined products.

In years past, gasoline prices typically followed oil prices. And oil and gas shocks were once smoothed over by plentiful inventory and refining capacity, Sly said.

But inventory has dwindled and capacity has lessened following the COVID-19 pandemic, the Russia-Ukraine conflict, and now, the Iran conflict, making refining and the crack spread a greater part of the gas-price equation.

"Now, we're in a situation that when oil prices go up, so does the crack spread above it," Sly said. He added that the destruction of refining facilities in the Iran conflict has also made global refining capacity "much more limited."

Sly said the crack spreads are "likely to remain elevated" — meaning persistent upward pressure on gas prices — because refining capacity takes "months to destroy and decades to build."

Sly also touched on artificial intelligence and how a narrow set of businesses, primarily those building out AI infrastructure, are the ones driving much of the U.S. economy's growth and capital investment.

He also said that, in the long term, AI growth could add more volatility to the economy.

"The volatility of AI production is actually akin to the boom-bust cycles of oil and gas," Sly said. "This is a technology that could increase the frequency of the ups and downs of the business cycle."

Today's economy is resilient, Sly said, adding that consumers continue to spend despite market challenges. But it's also marked by inflation, which is why the Fed raised interest rates this month.

The consumer price index rose 3.4% last month compared with a year ago, well above the Fed's 2% target, according to the U.S. Bureau of Labor Statistics. Sly said it isn't just how much prices rose but how many goods saw increases that prompted the Fed to step in.

"Around 85% of the goods that American households buy are increasing in price from month to month. That is a pretty extensive increase in overall pricing," Sly said.

Since higher rates make people spend and borrow less, sectors like the housing industry will be impacted by the recent rate increase. Sly said highly competitive AI-building industries will be less constrained.

"The biggest thing is to plan," Sly said.

Kylie Garcia covers retail and real estate for the Journal. You can reach her at kgarcia@abqjournal.com.

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