Question 1

Why does the oil price affect everything?

Accepted Answer

Because crude is the input to almost every physical good you buy and almost every mile a truck drives to deliver it. Gasoline and diesel are the obvious ones. But crude is also the feedstock for the plastics around your groceries, the asphalt under your tires, the synthetic fiber in your t-shirt, and the fertilizer that grows the food in the first place. When a barrel gets more expensive, every one of those inputs gets more expensive in turn. The Fed cannot raise rates fast enough to offset a real oil shock, which is why oil is the one price on the planet that shows up in policy debates as if it were its own category of weather.

Question 2

What is the relationship between oil and inflation?

Accepted Answer

Direct energy is about 7% of headline CPI, which means a 10% move in gasoline is worth about 0.7 percentage points on the headline print all by itself. Then there is the indirect channel, where diesel moves the goods, natural gas heats the warehouse, and plastic wraps the product. Add those up and the headline index absorbs roughly 1.5 basis points per $1/bbl of crude, which is the elasticity the widget above uses. The core CPI, which strips out food and energy, is less sensitive, but it is not immune. Over six to twelve months, a sustained oil shock leaks into core through transport and packaging. That is the lag that makes oil inflation so hard to unwind.

Question 3

What is OPEC?

Accepted Answer

The Organization of the Petroleum Exporting Countries, founded in 1960, a cartel of national oil producers that meets a few times a year in Vienna and agrees on how much to pump. Saudi Arabia is the center of gravity. Since 2016 the wider group has been called OPEC+, which folds in Russia and a handful of non-OPEC producers who coordinate on the same quotas. Between them they sit on about 40% of global crude supply and something like 80% of proven reserves, which is why an OPEC+ meeting moves the oil futures curve the way an FOMC meeting moves the Treasury curve. A cut takes barrels off the market, a hike adds them, and prices adjust before the barrels actually do.

Question 4

How does oil affect airline prices?

Accepted Answer

Jet fuel is roughly a quarter of an airline's total operating cost, which makes it the single largest line after labor. Jet fuel, in turn, moves about 0.6% for every $1/bbl change in crude, so a $10/bbl rally in WTI is a 6% jump in jet fuel and, with full pass-through, about 1.5% on your ticket. Airlines hedge some of this with fuel futures, which smooths the shock over quarters instead of days, but they do not eliminate it. When crude stays high for a year, every airline rebases its fare structure and the cheap seats quietly disappear. That is the version of the ripple you notice when you go to book a flight.

Question 5

What is Brent vs WTI crude?

Accepted Answer

Two different grades of crude traded on two different continents. WTI, for West Texas Intermediate, is the US benchmark, priced at Cushing, Oklahoma, and settled in the NYMEX pit. Brent is the global benchmark, priced in the North Sea and settled on ICE. Brent typically trades a few dollars above WTI, because Brent is waterborne and can ship anywhere while WTI is landlocked and has historically had more US supply chasing the same pipeline capacity. Two-thirds of the world's physical crude is priced off Brent. The US domestic retail gasoline market is priced off WTI. When you hear one number on the news and a different number at the pump, this is usually why.

Why oil moves everything.

The oil ripple

Oil, answered.

Why oil moves everything.

The oil ripple

Oil, answered.

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