BP's $3.2 Billion Quarter and Your $4.12 Gallon Are the Same Problem — and the Fed Can't Fix Either One

On Tuesday morning, BP reported that its first-quarter profit more than doubled to $3.2 billion¹, comfortably beating analyst expectations of $2.63 billion. The company described an "exceptional" oil trading performance. Its customers and products division — the unit that includes oil trading — saw profits surge to $2.5 billion from $103 million² a year earlier. The stock is up 32% year to date.

The same day, the Federal Reserve opened its April meeting, where it will almost certainly hold rates steady³ at 3.5% to 3.75% for the third consecutive time this year. Markets are pricing a 100% probability of no change⁴. Gas prices, per AAA, sat at $4.12 a gallon nationally⁵ as of April 27 — up 47% since January and 32% higher than a year ago. CPI hit 3.3% in March⁶, the highest reading in nearly two years.

These are not two separate stories. BP's trading bonanza and your $4.12 gallon are the same phenomenon viewed from opposite ends of the cash register. The Iran war, which began with joint U.S.-Israeli strikes on February 28, closed the Strait of Hormuz to nearly all commercial traffic — the waterway that normally handles 20% of global seaborne crude⁷. The IEA called it the "greatest global energy security challenge in history." Brent crude surged from roughly $72 a barrel before the war to over $110 as of this week⁸. Goldman Sachs and Citi warn it could hit $150 if disruptions persist through June⁹.

So energy companies pocket the volatility premium, consumers absorb the price shock, and the Fed sits in the middle, tasked with managing an inflation problem it did not create and cannot directly solve. I've spent two weeks working through the evidence on what the Fed should actually do here, and I've landed in a place that will frustrate people on both sides of the hawkish-dovish divide: the Fed is right to do very little, not because it doesn't matter, but because aggressive action in either direction is more likely to cause harm than to help.

Let me walk through why.

The case for aggressive rate hikes rests on a historically powerful analogy. In the 1970s, Arthur Burns' Fed accommodated two oil shocks, letting energy prices feed into wage demands and broader inflation expectations. The result was a decade of stagflation that required Paul Volcker to raise rates to 20% — a cure far worse than the preventive medicine Burns refused. The lesson seems clear: don't let a supply shock become embedded expectations. Tighten now, tighten hard, accept the short-term pain.

But the analogy breaks on closer inspection, and a remarkable new study from the Fed's own Dallas branch is the reason I think so. A working paper by Kilian, Plante, Richter and Zhou¹⁰, released April 17, models the Iran war's inflationary impact under multiple scenarios. Their headline finding: under a plausible baseline, Q4-over-Q4 headline PCE inflation rises by 0.6 percentage points, while core PCE rises by just 0.2 percentage points. More striking, they find that 5-to-10-year inflation expectations rise by at most 0.07 to 0.09 percentage points¹¹. As Reuters summarized the paper's conclusion: "There is little evidence of higher gasoline prices being passed through to core inflation or long-run inflation expectations becoming unanchored."

This is a genuinely important finding because it tells us that the structural conditions of the 2020s are not the structural conditions of the 1970s. The economy uses less oil per dollar of GDP. Labor markets are more flexible. And decades of credible inflation targeting have built an institutional buffer that suppresses second-round wage-price transmission — exactly the mechanism that Blanchard and Galí documented in their influential 2007 research on why modern oil shocks behave differently than 1970s oil shocks.

Now here's where it gets complicated. The Dallas Fed model is estimated on historical relationships that, as of the April Michigan consumer sentiment data, may be straining. Year-ahead inflation expectations surged from 3.8% to 4.8% in a single month¹² — the largest one-month jump since April 2025. Five-year expectations ticked up to 3.5%, the highest since late 2025. Consumer sentiment crashed to a record low of 49.8¹³, worse than the trough of June 2022. Joanne Hsu, director of the Michigan survey, cautioned against complacency¹²: the 5-year number "could very well change quite quickly in the months ahead."

So the model says long-run expectations should hold. The survey data says short-run expectations are moving fast and the long-run anchor is wobbling. Which do you trust?

I think the right answer is: trust the model's structural insight while taking the survey data as a warning sign that deserves vigilance, not panic. Here's my reasoning. The 1990 Gulf War is a much closer structural analog to the current episode than the 1970s. That shock produced a roughly 70% oil price spike. Greenspan's Fed did not aggressively tighten into it. It actually cut rates. Inflation expectations held, no wage-price spiral materialized, and the economy recovered. The key difference from the 1970s was that the shock was clean — externally imposed, supply-driven, without the demand-side overheating (Vietnam spending, Great Society programs, Nixon's wage-price controls) that characterized the earlier period.

The current episode looks much more like 1990 than 1973. The Iran war is a geopolitical supply shock arriving into an economy that was already showing lackluster job growth³ — not an overheated one. March FOMC minutes revealed that policymakers saw both upside risks to inflation and downside risks to employment¹⁴. The dual-sided risk is the tell. When the Fed is worried about both overheating and weakening, the right move is usually to hold and watch.

And that is exactly what the Fed is doing. Chair Powell, at the March meeting, said the central bank did not yet need to raise rates¹⁴ in response to the oil shock, emphasizing that longer-run inflation expectations had so far remained stable. Fed Governor Stephen Miran went further, telling CNBC that "typically, the Federal Reserve doesn't respond to higher oil prices" because it "tends to be a one-off shock" that affects headline but not core inflation¹⁵.

But doing nothing with the interest rate is not the same as having no answer. This is where I think the conversation goes wrong. The Fed's hold is correct given its toolkit. What's incorrect is the broader policy environment in which the Fed is the only institution expected to respond.

Consider the asymmetry playing out right now. BP earns $3.2 billion in a quarter. Financial analysts predict American oil companies will receive a windfall of more than $60 billion this year¹⁶. Meanwhile, American consumers have paid an extra $20 billion for gas and diesel¹⁶ since the war started. Senator Whitehouse and Rep. Khanna have introduced the Big Oil Windfall Profits Tax Act¹⁷, which would impose a 50% per-barrel tax on the difference between current and pre-war oil prices, with revenue returned to consumers as quarterly rebates. In Europe, five countries have already called for an EU-wide windfall tax¹⁸.

A windfall tax paired with consumer rebates would do something the Fed rate lever cannot: it would directly redistribute the supply-shock premium from producers to consumers, dampening the demand destruction that higher gas prices create while not requiring the blunt instrument of economy-wide rate increases. It would also address the political legitimacy problem that makes the current situation toxic — the visible spectacle of record energy company profits alongside household pain.

The reason the Fed appears to have "no good answer" is not an institutional failing of monetary policy. It's a political failing of fiscal policy. Congress could act. It is choosing not to. The IEA coordinated a 400 million barrel release of petroleum reserves⁷ in March. New Zealand gave $50 tax credits to 143,000 working families⁷. Canada suspended federal fuel taxes. The U.S. response, by contrast, has been the White House calling it "temporary disruptions"⁶ while economists from the OECD to the CFR project inflation hitting 4.2% this year¹⁹.

The strongest counter to my position is the expectation drift visible in the Michigan survey. If 5-year expectations keep climbing — say, past 4% — the calculus changes. At that point the credibility buffer the Dallas Fed model relies on would genuinely be eroding, and the Fed would need to signal willingness to tighten, even knowing the cost. But we are not there yet. The 5-year figure is 3.5%, elevated but within the range seen in late 2025 before the war. Forward inflation measures beyond one year in financial markets have been "little changed"¹⁴ since the conflict began, a signal that bond traders — who bet real money — still view this as temporary.

Here's what to watch. This week's FOMC statement on Wednesday will be Jerome Powell's likely last as chair, with Kevin Warsh expected to take over by the June meeting⁴. Warsh has signaled both a desire to cut rates and a commitment to strict 2% targeting — goals that are, as one analyst noted, "in direct tension"²⁰ when oil is above $100. The real indicator is not Wednesday's rate decision (it will be a hold) but the May and June Michigan survey long-run expectations. If the 5-year figure breaches 4%, the Warsh Fed will face a credibility test on its very first real decision. Until then, the correct read is that the Fed is doing the least-bad thing with a tool that cannot drill oil or tax windfall profits. The failure belongs elsewhere.