Oil surge widens rift as energy profits jump 50 percent

A wartime surge in oil prices is fueling a stark divergence in the U.S. economy, rewarding energy investors with near 50 percent profit growth while eroding American paychecks.

A conflict-driven surge in oil prices above $100 a barrel is widening a chasm in the global economy, fueling a nearly 50 percent jump in European energy sector profits while pushing U.S. consumer inflation to its highest level since May 2023.

“Negative wages have set in amongst the American public,” Joe Brusuelas, chief economist at RSM, said in a Yahoo Finance interview. He noted that while the market can look through higher inflation, for the middle and working class, “their living standards are in decline.”

The divergence is stark. First-quarter earnings for European energy giants like Shell plc and BP plc are on track to surge by nearly 50 percent, according to LSEG I/B/E/S data. In contrast, U.S. real average hourly earnings fell 0.3 percent in April as headline consumer inflation hit 3.8 percent, driven by a 17.9 percent annual spike in energy prices.

The dynamic presents a challenge for the Federal Reserve, which now faces renewed inflation pressure just as wage growth turns negative. While markets are pricing in a 98 percent chance of a rate hold in June, the odds of a December rate hike have climbed to nearly 30 percent, according to CME FedWatch data, complicating the path for an economy already bracing for a slowdown.

An Energy Windfall

The primary beneficiaries of the geopolitical tensions have been energy producers. With Brent crude futures rising 3.3 percent to trade above $107 a barrel and WTI crude topping $102, energy firms are seeing profits swell. European energy majors have been standout performers, with LSEG I/B/E/S data showing the sector is set for its fastest earnings growth since early 2023. Strong trading profits from heightened volatility have also bolstered results for firms like Shell, BP, and TotalEnergies SE.

This performance contrasts sharply with the broader European market, where the STOXX 600 index has fallen 2.3 percent since the conflict began. It also highlights a growing transatlantic divide; over the same period, the S&P 500 has gained 8 percent and the tech-heavy Nasdaq Composite has advanced 17 percent, buoyed by strong earnings from technology giants like Microsoft and Alphabet.

The Consumer Squeeze

For consumers, the story is one of mounting pressure. The U.S. Consumer Price Index for April showed energy commodity prices, including gasoline, soaring 28.4 percent year-over-year. That has directly contributed to the 0.3 percent decline in real average hourly earnings, the first annual drop in three years.

The pain is widespread, with Euro zone consumer confidence falling to a three-and-a-half-year low. Consumer-facing sectors are feeling the strain. A basket of European luxury stocks has dropped more than 20 percent this year, and British pub chain JD Wetherspoon plc recently issued its third profit warning in five months. Even coffee chains like Starbucks and Dutch Bros are absorbing rising commodity costs to avoid alienating inflation-weary customers, according to Dutch Bros CEO Christine Barone.

Analysts at Amundi Investment Institute warned that a prolonged conflict would likely hurt European growth, cautioning that firms may struggle to pass on rising costs to consumers as they did during the initial inflation shock following the Ukraine war.

This article is for informational purposes only and does not constitute investment advice.