President Donald Trump has a crack problem — and America is paying the cost of it, according to Nobel Prize-winning economist Paul Krugman.
Krugman argued on Substack Thursday that Americans are unlikely to see gas prices drop because, as he put it, “Donald Trump is not a well man. He is, unfortunately, also President, which means that we all pay a price for his inability to accept reality.“
That “reality,” according to Krugman, is that Iran has outmaneuvered him and the war is lost.
The former New York Times economist argued oil prices are higher than is generally understood because of the difference between the cost of a barrel of crude and that of the products refined from that barrel — or “crack spread.”
Since the beginning of the war, that crack spread has “exploded,” rising by roughly $35 per barrel, Krugman wrote.
Refining capacity worldwide has been significantly constrained because much of the world’s refining capacity is either trapped inside the Strait or offline as a result of Ukraine’s drone campaign against Vladimir Putin, according to Krugman’s analysis.
Therefore, the shortage of refining capacity has held crude prices down, as buyers are not willing to pay extremely high prices for crude oil they cannot refine, explained the economist.
The cutoff of oil shipments through the Strait of Hormuz has required a large rise in global oil prices to ration demand, but much of that rationing has taken place through a rise in “the crack spread” rather than a rise in crude oil prices. For the United States, the implications are immediate, the economist warned.
Inflation, which was held down in recent months by falling fuel prices, is set to rise again in upcoming economic data. Gasoline prices have risen back above $4 per gallon, while diesel prices have returned above $5 per gallon.
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