Mon. Dec 6th, 2021


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Welcome back. It seems like I was wise not to write about the market implications of the debt limit; a ceasefire was set to postpone the whole mess until the end of the year. Like everyone else, I watch the rates of US credit change rise as these dumb arguments escalate, but always accept that it’s ultimately SFSN (sound and anger that means nothing). Maybe one day I will be wrong. Email me: robert.armstrong@ft.com

Energy prices, inflation and growth

Here is a graph:

These are different global prices for fossil fuels, which were reused up to 100 again six months ago. The only problem with bringing it together is that rising natural gas prices in the UK and liquefied natural gas in Asia are overshadowing the simply staggering doubling of Chinese coal and US natural gas prices. The objectively impressive 30% increase in Brent -ru prices looks positive in comparison.

The big question about the run-up to global energy costs is how long it will take. That is, we are looking at a temporary imbalance between supply and demand – a much larger version of, for example, the wild rise in US timber prices, which peaked at four times the normal level in May. , only to return completely in August? Or is it something more lasting?

Depending on the answer to the question, there are two queries: how much will these price movements broaden inflation? And how big will the growth of global growth be?

To the big question, part of the answer is that the supply of fossil fuels has been declining for years due to a lower investment in mining. For example, here is a graph of capital expenditure, in absolute terms and as part of sales, by energy companies in the S&P Global 1200 energy index (data from Capital IQ):

If private equity investment is included, the picture may look a little different, but I suspect the trend will be the same. Part of this is the efforts to reduce carbon emissions. This is most evident in the case of coal, but governments and investors generally discourage new energy projects, and energy companies listen.

Decarbonization, however, is only part of the supply story. Another part of it is that the management of energy companies, especially with American energy producers, listens to shareholders and wants to give shareholders back capital to them, rather than investing in new projects. It comes from a remarkable recent FT maintenance with Scott Sheffield, who manages Pioneer Natural Resources, one of the largest US shale oil producers:

Everyone [in the industry is] will be disciplined, whether it’s $ 75 Brent, $ 80 Brent or $ 100 Brent. All the shareholders I spoke to said that if anyone goes back to growth, they will punish the companies. . .

There are no growth investors investing in U.S. majors or U.S. shale. Now these are dividend funds. So we can not just sweep the people who buy our shares. . .

I get just as many dividends from my stock next year as in my total compensation. This is a total change in attitude.

The attitude change shows. This is the number of active oil and gas platforms in the US since 2000 (Baker Hughes data):

As prices rise more, investors and operators may plan to change new oil and gas investments. And there may already be a change in sentiment. I spoke to Andrew Gillick, a strategist at energy consultant Enverus, and he told me that while investors are focusing on capital returns, investor interest in oil and gas is rising and that energy fund managers are raising money again:

They talked to oil and gas funds a year ago, and they were dealing with redemptions. Those who can still invest are excited about the opportunity, both as a hedge against inflation and as a hedge against a longer energy transition – and because they see operators committing themselves to discipline and capital returns.

But a big shift in spending will take time. It takes about six months to get a new rig up and running. The supply pressure on fossil fuels will not decrease rapidly.

Will a higher level of energy prices feed inflation in other areas? The recent jump in inflation-break-even rates of 10 years (from 2.28 percent two weeks ago to 2.45 percent now) was certainly very wide attributed to to energy prices. But the ratio is not determinative. Consider this graph of break-even points and Brent crude oil:

As Oliver Jones of Capital Economics points out, the early 2000s show that although the ratio is close, it has not been determined. At that point, Brent shot up and inflation-breaking broke up. Here is Jones:

At the time, the integration of China’s booming economy with the rest of the world helped drive the goods ‘superbikes’, but it also put pressure on the prices of manufactured goods worldwide. Meanwhile, there was only limited inflation in the US. The Fed raised the interest rate by 425 bp in two years, and fiscal policy was not particularly loose. In contrast, China’s economy today is slowing down and disconnecting from the US. At the same time, we think that domestic price pressures in the US will remain stronger in the coming years than in the 2000s or 2010s, reflecting both the effects of the labor market pandemic and the changing priorities of policymakers.

As a result, Jones thinks that inflation could increase more, even if energy prices go back as supply and demand rebalance.

Finally, how much can a sustained rise in energy prices affect the economy? Just look at the US gas price and US consumer spending on energy (hint to @francesdonald):

This is now a definite relationship. Here’s how Ian Shepherdson, of Pantheon Macroeconomics, sees math:

People currently spend about $ 7 billion a month on utilities and $ 31 billion a month on gasoline, which together make up 7.3 percent of the CPI. Total ex-petrol retail sales amounted to $ 569 billion in August, so a 5 percent increase in energy prices would suppress other retail sales by up to 0.3 percent, forcing people to divert spending on other goods and services. Or at least, that’s what would happen under normal circumstances.

But these are not normal circumstances. Americans saved a lot of money in the pandemic, which Shepherdson graphs as follows:

The excess cash will therefore likely incur the extra expenditure on gas, and non-gas consumer spending will not be affected. The problem, however, is that the excess cash is mostly in the pocket of the rich, who tend to save rather than spend incremental wealth. Middle- and working-class Americans, on the other hand, may feel the pinch of prices at the pump and cut elsewhere. This graph from the Fed Guy blog shows how the wealth accumulated during the pandemic was distributed:

The Americans who have always been worried about gas prices will now be particularly worried, and this is likely to play a role in growth.

A good reading

Speaking of oil, this is frightening.

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