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Welcome back.It seems that I do not write about the impact of debt restriction chaos on the market is wise; truce The entire chaos will be postponed to the end of the year. Like everyone else, I watched the price of US credit default swaps rise as these stupid arguments escalated, but always assumed that it ended up being SFSN (voice and anger have no meaning). Maybe one day I will be wrong. Email me: firstname.lastname@example.org
Energy prices, inflation and growth
This is a chart:
This is the global fossil fuel price, which was recalculated as 100 six months ago. The only problem putting them together is that the absolute crazy rise in the price of natural gas in the United Kingdom and the price of LNG in Asia has masked the astonishing doubling of Chinese coal and American natural gas prices. In contrast, the objectively impressive Brent crude oil price rose by 30%, which looks positive.
The big question about rising global energy costs is how long it will last. In other words, are we considering a temporary imbalance between supply and demand-for example, a larger version of the sharp increase in U.S. timber prices, which reached four times the normal level in May, but did not fully fall back until August? Or is this something more durable?
Based on the answer to this question, there are two subsidiary questions: To what extent will these price changes stimulate inflation more broadly? How big is their drag on global growth?
Part of the answer to this big question is that the supply of fossil fuels has been declining for years because of the low investment in mining. For example, the following is the capital expenditure chart of the absolute value and sales ratio of energy companies in the S&P Global 1200 Energy Index (data from Capital IQ):
The situation may be different if it includes investment by privately held companies, but I suspect that the trend is the same. Part of this is due to efforts to reduce carbon emissions. This is most obvious in coal, but the government and investors generally oppose new energy projects, and energy companies are listening.
But decarbonization is only part of the supply story. The other part is that the management of energy companies, especially US energy producers, is listening to the opinions of shareholders, who want to return capital to them instead of investing in new projects.This is the most eye-catching Financial Times interview with Scott Sheffield runs Pioneer Natural Resources, one of the largest shale oil producers in the United States:
Everyone [in the industry is] Whether it is 75 US dollars Brent crude oil, 80 US dollars Brent crude oil or 100 US dollars Brent crude oil, will be subject to disciplinary action. All the shareholders I have spoken to said that if anyone resumes growth, they will punish these companies. ..
No growth investor invests in major US oil companies or US shale oil. Now it is a dividend fund. So we can’t just brainwash the people who buy our stocks. ..
Next year I will receive as much dividends from my stock as my total compensation. This is a radical change in the way of thinking.
The change in mentality is revealed. This is the number of oil and gas rigs that have been active in the United States since 2000 (Baker Hughes data):
If prices rise further, investors and operators may change their views on new oil and gas investments. And the mood may have changed. I talked to Andrew Gillick, a strategist at Enverus, an energy consulting company, and he told me that although investors are concerned about capital returns, investor interest in oil and gas is rising, and energy fund managers are raising funds:
When talking to the Oil and Gas Fund a year ago, they were dealing with redemption issues. Now, those who are still able to invest are excited about this opportunity as both a hedge against inflation and a hedge against the long-term energy transition, because they see operators’ commitment to discipline and return on capital.
But a major shift in spending will take time. The installation and operation of the new drilling rig will take about six months. The pressure on the supply of fossil fuels will not ease soon.
Will the higher plateau period of energy prices contribute to inflation in other areas?Of course, the recent 10-year inflation break-even rate (from 2.28% two weeks ago to 2.45% now) has risen sharply Attributed to To energy prices. But this relationship is not certain. Consider this break-even point and Brent crude oil chart:
As Oliver Jones of Capital Economics pointed out, the early 2000s showed that although this relationship is close, it is not fixed. At that time, Brent crude oil soared, and the inflation balance shrugged. This is Jones:
At that time, the integration of China’s booming economy with the rest of the world promoted the “super cycle” of commodities, but it also put downward pressure on global finished product prices. At the same time, domestic inflation in the United States is limited. The Fed raised interest rates by 425 basis points in two years, and its fiscal policy was not particularly loose. In contrast, today’s Chinese economy is slowing and decoupling from the United States. At the same time, we believe that domestic price pressures in the United States will continue to be stronger in the next few years than in the 2000s or 2010s. This reflects both the impact of the pandemic on the labor market and the changing priorities of policymakers.
Therefore, Jones believes that even if energy prices fall due to the rebalancing of supply and demand, inflation may rise further.
Finally, how much drag will the continued increase in energy prices cause to the economy?Well, look at the price of gasoline in the U.S. and the energy expenditure of U.S. consumers (Hat Tips @Frances Donald):
Now this is a definite relationship. Here is Ian Shepherdson of Pantheon Macroeconomics on mathematics:
At present, people spend about 7 billion U.S. dollars on public utility energy services and 31 billion U.S. dollars on gasoline, which together account for 7.3% of the CPI. The total retail sales excluding gasoline in August was US$569 billion. Therefore, every 5% increase in energy prices will force people to divert spending from other goods and services, thereby reducing other retail sales by as much as 0.3%. Or at least, this is what happens under normal circumstances.
But these are not normal conditions. Americans saved a lot of cash during the pandemic, and Shepherdson draws it as follows:
Therefore, perhaps the excess cash will only absorb additional natural gas expenditures, and non-natural gas consumer expenditures will not be affected. But the problem is that most of the excess cash is in the pockets of the rich, and they tend to save rather than spend incremental wealth. In contrast, the American middle class and working class may feel the pressure of gas station prices and cut prices elsewhere.This chart is from Fed Guy Blog Shows how the wealth accumulated during the pandemic was distributed:
Those Americans who have been worried about gasoline prices are now particularly worried, which may be important for economic growth.
A good book
Speaking of oil, this very scary.