A couple of days ago, I wrote to my friend Dan Alpert to get his thoughts on a popular line of argument that’s been nagging at me for a while. Dan is Managing Partner at Westwood Capital, and someone I frequently correspond with about macro and financial markets. Dan thinks a lot about energy and oil.
In other words: Raising interest rates based on oil supply and demand is macroeconomic malpractice.
Professor Reich has been screaming that from the rooftops since the beginning. But as the writer said, people want and demand relief immediately, so politicians must respond, in this case using clumsy tools; they want to see action, something, anything.
England of the Middle Ages considered patience a virtue. We Americans want instant gratification. Mea culpa. I want to keep using lots of gasoline, but not pay high prices for it.
Very wise comments from Dan. The Fed is making a grievance mistake that will cost the global economy hugely.
On oil specifically, it's worth noting that the usually cautious World Bank has put out an analysis that mirrors what Stephanie (and Dan) have been arguing. It is suggesting a global recession might happen if the central banks continue to tighten policy.
The World Bank data on post-war global GDP says that in severe recessions global GDP goes negative and in mild recessions falls to a 1.5% rate. That appears to be quite likely given the current trajectory of both monetary and fiscal policy.
Since 2016 the average rate of decline in oil intensity of use has been 2.5% a year.
In a global recession with 1.5% economic growth oil demand would go to a negative 1%
Throw that into the IEA and EIA balances and demand growth goes from 2% to negative 1% and the market surplus goes from close to 1 million barrels a day to close to 4 million barrels a day. All of which suggests that the oil price could crash very soon.
The hilarious bit of business here is that the orthodox economists' convention is to rely on "price discovery" in the "free market" for oil as some excuse for Fed policy...but (and a big "but")... according to Daniel Yergin's history of the petroleum industry ("The Prize") there has *never* been anything resembling a free market for oil. From Rockefeller's monopoly (Standard Oil) to the Texas Railroad Commission, to the Oklahoma Corporation Commission, to Harold Ickes' office in the FDR administration to OPEC, there are constant reminders that oil is too volatile a commodity to leave to anything resembling a free market. Yet another instance for orthodox economics to resemble medieval astronomy.
What about the effect of elevated natural gas prices on the economy? Part of the driver for increased demand for US natural gas is Europe turning to US LNG exports to replace natural gas they can’t or won’t buy from Russia. Part of it is due to the increasing usage of natural gas for electric generation--due to a general trend of retirement of coal-fired power plants and due to the rail delivery shortfalls experienced across the US but particularly impacting deliveries of coal to the remaining coal plants. In order to have enough coal on hand to ensure reliable operations in winter months, utilities are reducing operations at their coal units, which, when combined with higher costs of generating electricity from natural gas plants, is driving wholesale electric prices to record highs. I’m not an economist, but higher electricity costs--which are typically passed on at least in part to businesses and consumers, have to have played some role in the inflation we’re experiencing.
While it may be true that "We’d be doing a lot better on inflation if Russia hadn’t invaded Ukraine", the real cause of the energy shortage is the crazy sanctions on Russia. It was not Russia that cut its gas. In fact some commodities, such as Uranium, are not sanctioned. So maybe the first step would be to review the real effect of sanctions: to punish Russia the collective west has punished itself. Let's Go Brandon.
My question is, why would speculators feel the fed raising interest rates and/or enacting accommodative policies would lead to higher inflation when the general Neoclassical view is these policies are to bring down inflation?
Regardless that the strength of the dollar and oil prices are showing not to correlate since the '70s
Thank you so much for sharing that illuminating analysis.Financialization strikes again!
In other words: Raising interest rates based on oil supply and demand is macroeconomic malpractice.
Professor Reich has been screaming that from the rooftops since the beginning. But as the writer said, people want and demand relief immediately, so politicians must respond, in this case using clumsy tools; they want to see action, something, anything.
England of the Middle Ages considered patience a virtue. We Americans want instant gratification. Mea culpa. I want to keep using lots of gasoline, but not pay high prices for it.
Very wise comments from Dan. The Fed is making a grievance mistake that will cost the global economy hugely.
On oil specifically, it's worth noting that the usually cautious World Bank has put out an analysis that mirrors what Stephanie (and Dan) have been arguing. It is suggesting a global recession might happen if the central banks continue to tighten policy.
The World Bank data on post-war global GDP says that in severe recessions global GDP goes negative and in mild recessions falls to a 1.5% rate. That appears to be quite likely given the current trajectory of both monetary and fiscal policy.
Since 2016 the average rate of decline in oil intensity of use has been 2.5% a year.
In a global recession with 1.5% economic growth oil demand would go to a negative 1%
Throw that into the IEA and EIA balances and demand growth goes from 2% to negative 1% and the market surplus goes from close to 1 million barrels a day to close to 4 million barrels a day. All of which suggests that the oil price could crash very soon.
The hilarious bit of business here is that the orthodox economists' convention is to rely on "price discovery" in the "free market" for oil as some excuse for Fed policy...but (and a big "but")... according to Daniel Yergin's history of the petroleum industry ("The Prize") there has *never* been anything resembling a free market for oil. From Rockefeller's monopoly (Standard Oil) to the Texas Railroad Commission, to the Oklahoma Corporation Commission, to Harold Ickes' office in the FDR administration to OPEC, there are constant reminders that oil is too volatile a commodity to leave to anything resembling a free market. Yet another instance for orthodox economics to resemble medieval astronomy.
What about the effect of elevated natural gas prices on the economy? Part of the driver for increased demand for US natural gas is Europe turning to US LNG exports to replace natural gas they can’t or won’t buy from Russia. Part of it is due to the increasing usage of natural gas for electric generation--due to a general trend of retirement of coal-fired power plants and due to the rail delivery shortfalls experienced across the US but particularly impacting deliveries of coal to the remaining coal plants. In order to have enough coal on hand to ensure reliable operations in winter months, utilities are reducing operations at their coal units, which, when combined with higher costs of generating electricity from natural gas plants, is driving wholesale electric prices to record highs. I’m not an economist, but higher electricity costs--which are typically passed on at least in part to businesses and consumers, have to have played some role in the inflation we’re experiencing.
While it may be true that "We’d be doing a lot better on inflation if Russia hadn’t invaded Ukraine", the real cause of the energy shortage is the crazy sanctions on Russia. It was not Russia that cut its gas. In fact some commodities, such as Uranium, are not sanctioned. So maybe the first step would be to review the real effect of sanctions: to punish Russia the collective west has punished itself. Let's Go Brandon.
My question is, why would speculators feel the fed raising interest rates and/or enacting accommodative policies would lead to higher inflation when the general Neoclassical view is these policies are to bring down inflation?
Regardless that the strength of the dollar and oil prices are showing not to correlate since the '70s