U.S. could hit record oil production figures in 2023 1:33

New York (CNN) -- Fall usually coincides with a drop in gas prices, as the summer road travel season ends and demand at gas stations declines. However, this year fuel prices have risen and are only a few cents away from their highest level so far in 2023.

That's because aggressive oil supply cuts in Saudi Arabia and Russia, along with deadly floods in Libya, sent crude prices soaring. The cost of oil hit a 10-month high on Friday and is on track for its biggest quarterly increase since Russia invaded Ukraine in early 2022.

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Rising oil prices bode ill for Wall Street: it signifies higher inflation and introduces the possibility of further interest rate hikes by the Federal Reserve. Higher prices at the pump also mean less spending by consumers elsewhere and a greater chance of recession.

There is already plenty of reason to worry this fall: auto workers are on strike, the federal government could face a new shutdown, China's economy remains weak, and geopolitical tensions are rising.

Is rising oil prices another item to add to the list?

David Kelly, global chief strategist at JPMorgan Asset Management and self-declared alarmist, doesn't think so.


CNN's "Before the Bell" spoke with Kelly about why Americans don't have to fear gas prices, at least for now.

The following interview was lightly edited for length and clarity.

How far do you think oil prices will go?

David Kelly: If there is any other shock, some major storm in the Gulf of Mexico, it could rise higher. But we don't think the trend in the next year and the next is going to be upward.
There are several reasons for this.

One thing we need to remember is that the price of everything has gone up, and all the costs of producing oil have gone up. Sure, we're $90 a barrel now, but if we measure it in today's dollars, we actually peaked at about $184 a barrel in 2008. When adjusted for inflation, oil is not as high now.

Another thing is that the United States has reduced its Strategic Petroleum Reserve. There was excess inventory that we could use to try to balance the market, and it's not as big as it used to be.

Looking ahead, U.S. production is growing very rapidly: today we produce more crude than Russia or Saudi Arabia. This will be a record year for U.S. liquid fuel production, and next year is going to be even stronger.

The world economy is growing slowly, which will limit the growth of fossil energy demand. And, frankly, the transition to green energy is also limiting demand growth.

So, on the supply side, I think the United States and other non-OPEC countries will help, and on the demand side, I don't see a lot of economic growth and not a lot of demand for fossil fuels. So I don't expect economic trends to push prices up much, although of course some shock could occur.

Why are oil prices so closely linked to the recession?

Kelly: Expensive oil has a very unpleasant triple effect: it drives up inflation and sometimes forces tighter monetary policy, while reducing consumers' ability to spend on other things.

We saw it clearly in the 1970s, when high gas prices meant people had less money to spend on other things and, meanwhile, the Federal Reserve raised rates too high to fight inflation. That's why oil caused a recession in 1974-1975 and caused double recessions in 1980 and 1982. The Great Financial Crisis of 2008 was not about oil, but consumers were in a weakened position going into it because of all the money they were spending on gasoline. These are all reasons why Americans have come to fear an uptick in the gas pump.

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What do high oil prices mean for inflation and future Federal Reserve rate hikes?

Kelly: I certainly hope the Fed doesn't react by raising interest rates once again. We don't think they're going to raise them in September, and the futures market says there's a 50% chance they'll do so once again in November.

Economists and the rest of the world talk about inflation differently: economists talk about inflation as the rate of change in prices, and consumers think there is inflation when prices are high. For inflation to disappear, the price of gasoline does not need to fall, but to stop rising.

I think we're going to continue to see high prices for a lot of things, including gasoline, but I don't think we're going to see an acceleration in prices.

We believe inflation will be below the Fed's 2% target in the fourth quarter of next year.

The Federal Reserve measures year-over-year inflation, so the fact that we're seeing a rebound in gas prices right now makes it more likely that for next year price growth will be below 2%.

We've been on this roller coaster, but the great thing about a roller coaster is that you get off where you got on, no matter how bumpy the ride was.

  • Why do consumer prices remain high in the U.S. even though inflation fell?

What should investors do in the meantime?

Kelly: Continue to look for opportunities to invest in the energy transition. The most important thing is not the short-term price of oil, but the fact that those who control it, the Saudis and the Russians, are not particularly friendly with the United States at the moment.

Although we are net exporters of oil, we are still affected by their ability to influence the market in a way that does not benefit us. I think this recent rise in oil only confirms the fact that we need to invest in something other than fossil fuels.

If the Fed raises rates once again, I think it increases the risk of recession. So make sure you're positioned a little more defensively because of the danger that higher gas prices will increase the risk of recession.

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