Former White House adviser warns: An oil crisis is approaching the United States, and U.S. Treasury yields may spiral out of control across the board.
The United States is facing an oil price shock that is more complex and offers fewer policy tools than the energy crisis of 2022.
According to the Financial Times, former senior White House energy adviser Amos Hochstein warns that upward pressure on oil prices is far from over and will push up long-term US Treasury yields through inflation and fiscal channels. On one hand, the disruption in physical supplies caused by the blockage of the Strait of Hormuz far exceeds any historical precedent and cannot be restored in the short term; on the other hand, the structural "refining dilemma" means that even if crude oil supply resumes, refineries cannot quickly convert it into gasoline.
Meanwhile, the two major tools used to cope with the 2022 oil crisis are now ineffective: Strategic Petroleum Reserve (SPR) has dropped to about 374 million barrels, leaving limited room for further releases; shale oil production has hit its ceiling, with no capacity for rapid increases in the short term.
Hochstein forecasts that the rise in oil prices in May will transmit to core CPI in about two months, meaning inflation data in July and August will show a significant uptick, thereby limiting space for Fed rate cuts and keeping policy rates elevated.
Dual Crisis Overlap, Unprecedented Supply Gap
This oil price shock consists of two mutually reinforcing crisis chains.
First, disruption of physical supply. The closure of the Strait of Hormuz has cut off more than 12 million barrels per day of global oil supply, which the International Energy Agency (IEA) has characterized as the most severe global energy security challenge in history.
Second, structural refining dilemma. The crack spread for jet fuel has reached a record $80 per barrel, far exceeding 2022 highs, prompting a massive shift in refinery capacity from gasoline to jet fuel. The result: refineries are running at full capacity, but gasoline output is down by about 340,000 barrels per day compared to a year ago.
US Energy Information Administration (EIA) data shows that in recent weeks, US gasoline inventories have been depleted by about 4 million barrels per week, widening the gap with the five-year average to nearly 11 million barrels. The lowest inventory level since EIA records began in 1990 may be reached as early as mid to late June.
Toolbox Exhausted, Policy Space Severely Reduced
Policy tools that were effective in suppressing oil prices in 2022 are now basically ineffective or already consumed.
In terms of strategic petroleum reserve, as part of the IEA coordinated response, the US has pledged to release 172 million barrels, of which about 80 million barrels have already been released, lowering reserves to about 374 million barrels. More crucially, with refinery capacity tilting toward jet fuel, additional crude oil releases cannot be converted into gasoline as efficiently as in 2022—as the size of reserves shrinks, the effectiveness of the policy is also substantially diminished.
On the production side, space for increased output is also limited. US crude oil and product exports set a record of 12.9 million barrels per day in late April, and daily product exports reached a new high of 8.2 million barrels in May. Hochstein points out that this leverage has been maximized, with no room for further increases.
Delayed Inflation Transmission, Bond Market Reacts First
The impact of energy price shocks on the macroeconomy is gradually emerging, and the worst is yet to come.
Hochstein notes that inflation data released last week already shows consumer energy prices rising faster and lasting longer than the Fed expected, but this does not reflect future trends. The transmission of energy prices into core CPI lags by several weeks, with May’s oil price pressure set to show up in July and August inflation data, creating new constraints for the Fed’s monetary policy path.
The bond market has reacted first. The yield on the 30-year US Treasury has climbed to its highest level since the financial crisis, and the 10-year yield has risen alongside it. Mortgage costs, corporate financing rates, and federal debt interest payments will rise, exerting broader transmission pressures on the real economy.
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