Inflation is always caused by an imbalance between supply and demand. And that imbalance is almost always due to the actions of government bodies. (Well, we think it’s almost always, but we are not certain.)
The oil market is a great example. A tight supply situation was exacerbated by Russia’s invasion of Ukraine. Prior to the invasion, there was a push toward renewable energy at the expense of traditional oil production. De-investment by large capital pools, such as public pensions and sovereign wealth funds, produced a deficit in new production. Now, take away the Russian supply and the imbalance worsens.
The demand side of the equation deserves some attention also. The global shutdown due to the pandemic threw a curveball, dramatically reducing oil consumption around the world as miles driven plunged. That turned out to be short lived relative to the supply side issues, as demand for oil is now above pre-pandemic levels.
Two recent events suggest that the supply/demand imbalance will not be temporary.
California is planning to give money to each resident so that they can afford gas. That’s well-intentioned but ill conceived. Providing funds for making purchases will keep demand higher than if the funds were not available. Normally, some would choose to lessen their usage as prices rise, but with this extra money, buyers will become less price sensitive, and demand will stay high.
In an attempt to bring prices down by increasing supply, the U.S. government has announced it will release oil from its strategic reserve. But the oil industry sees it differently. The release of oil from the reserves is limited in scope and, therefore, viewed as temporary. The oil producers know this and have stated that they will likely not respond quickly to increase capacity since prices are being manipulated downward. Why spend funds now to grow capacity when the oil will sell for less? Why not wait until the government has reduced its inputs so that prices rise, and then add capacity?
Such well-intentioned acts by governments are doing nothing to fight inflation. Instead, they are only building up the inflationary pressure.