Oil drives the economy.

It’s the fuel used to move raw materials and finished goods through the supply chain.

It powers the vehicles customers rely on to shop for products and transport them home.

Once home, consumers rely on oil and its byproducts for heat in some parts of the country.

Indirectly, oil byproducts are used to power the electric grid.

Oil is a critical commodity.

But its production and supply chain remain largely hidden from most Americans.

There are just 130 refineries in the country that convert crude oil to usable products like gasoline. In the past five years, 11 refineries have closed despite steady energy use.

Industry executives point out that modern refineries are more efficient. They can produce more than refineries of several years ago. That’s true, but total capacity has declined 3.6% in the past five years.

These facts explain how gains in energy prices have outpaced broad inflation indexes. The chart below shows the situation has deteriorated since the pandemic shut down the economy.

Oil Refineries Aren’t at Capacity

energy prices oil refinery capacity

Source: Federal Reserve.

Why Energy Prices Are Rising

Refineries are operating at about 90% of capacity. Before the pandemic, they frequently operated at greater than 100% capacity. That level of production is not sustainable, but it indicated that demand outpaced supply.

Demand has changed little since before the pandemic. Gasoline demand is down slightly but that is most likely a function of price. Stratospheric prices at the pump limit demand.

Demand for diesel is up as truckers move more goods than ever. The same is true for jet fuel which powers both passenger and cargo planes.

Overall, demand is steady and supply is down. This creates higher prices for any commodity.

There’s little chance refineries will be built due to regulatory concerns. Those same concerns weigh on production.

This is a long-term recipe for higher prices.

P.S. My friend, Adam O’Dell, has been tracking the energy sector for years now, and he’s found a massive opportunity targeting oil’s price surge. He’ll have more details soon.

Michael Carr, CMT, CFTe is the editor of two investment trading services — One Trade and Precision Profits — and a contributing editor to The Banyan Edge. He teaches Technical Analysis and Quantitative Technical Analysis at the New York Institute of Finance. Follow him on Twitter @MichaelCarrGuru.