Soaring energy prices – driven most recently by spikes in crude – helped drive the U.S. inflation rate to a 40-year high in January, creating both opportunity and risk for oil and natural gas companies.

inflation graph

The U.S. Bureau of Labor Statistics (BLS) said Thursday the consumer price index (CPI) jumped 7.5% in January from the same month a year earlier. The print marked the fastest rate of increase since February 1982 and the eighth consecutive month of inflation above 5%. The CPI had surged 7% year/year in December, setting the previous four-decade peak.

January energy prices spiked 27% from a year earlier — more than any other category tracked by the BLS, save for used cars (41%). Energy prices also were up 1% from December’s already lofty level.

Energy commodities, a subcategory including oil and gas, soared 40% year/year in January. U.S. crude prices recently reached a seven-year high, fueled by robust demand for gasoline and jet fuel as the economy gathers further momentum, travel rebounds and consumption surges.

Total U.S. petroleum consumption over the past four-week period averaged 21.9 million b/d, up 12% from the same period in 2021, the Energy Information Administration said this week.

Mounting demand spurs prices and creates substantial revenue potential for crude producers. Natural gas, trending lower in early February amid mild weather outlooks, had surged in 2021 and early this year, helping to fuel the broader energy price advance in January.

Profit And Peril

Fourth quarter earnings calls suggest the price surges drive both profit and peril.

Magellan Midstream Partners LP, which specializes in petroleum storage and transportation, said demand for its services swelled in the fourth quarter and is expected to grow further this year. CEO Michael Mears said during an earnings call with analysts that in response to inflation, the Tulsa-based company implemented 2021 wage increases. He expects current negotiations with union representatives to result in further bumps.

Others, including oilfield services operators and exploration and production companies, have said they are burdened with high fuel expenses, in addition to rising costs for everything from major equipment to materials.

“We’re seeing inflation of many items, which is putting upward pressure on both well and operating costs,” Oasis Petroleum Inc. President Taylor Reid said during an earnings call. The Houston-based independent, a Williston Basin pure play, said it is grappling with high prices for steel, chemicals and trucking services, among others.

The expense challenges are intense both in the United States and across most of the globe, said Norway-based international energy giant Equinor ASA. “Clearly, it is a concern and we’re monitoring it very, very carefully,” Executive Vice President Pal Eitrheim said during a quarterly earnings call.

Policymakers at the U.S. Federal Reserve, along with a host of central banks around the world, are poised to raise interest rates this year in an effort to cool spending and tamp down inflation. Higher rates would make borrowing more expensive at a time when most energy companies are trying to lower debt costs. Still, economists have said rising interest rates typically curb activity, while runaway price hikes would eventually wreak havoc.

“Higher inflation eats away at consumer purchasing power,” and if left unchecked, could force a “painful” pullback in economic activity when prices escalate beyond reasonable measures of affordability, said Raymond James & Associates Inc.’s chief economist Scott Brown.