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The can of worms that is our global use of energy, has been levered open yet further by the escalating war in Ukraine. Prices of all types of energy had already been hiked dramatically as a result of a strong economic rebound post-covid, but with limited capacity to meet additional demand. As a result of a potential embargo on Russian fuels, the UK price of natural gas briefly hit 800p per therm, or sixteen times that of March 2021. Oil prices too, are at a high not seen since just before the Great Recession of 2008, with Brent crude spiking at $128 a barrel, and driving record prices for petrol and diesel. Since energy underpins everything we do, its cost sets the baseline for all other commodities, including food, whose prices are also surging globally.

Europe is dependent on Russia for around 40% of its gas, thus making any supply restrictions extremely problematic, to put it mildly: for example, if Russia were to carry out its threat to cut off the gas. Similarly, refusals by the West to buy Russian oil beg the question of whether matching quantities can be secured from elsewhere. Given that oil is the lifeblood of industrial civilization, and we run the risk of a demand/supply gap, leading to soaring prices – $200 a barrel has been suggested – the economic consequences would almost certainly be catastrophic.

The European Commission has now pledged to curb massively its purchase of Russian gas: by some two thirds by the end of this year. The proposed mechanism for this includes establishing a greater diversity of suppliers, biomethane production, and energy efficiency strategies for buildings, including behavioural changes such as turning down thermostats to curb energy demand. Indeed, demand reduction must be a salient part of any viable future energy blueprint.
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This is not 1997

October 26, 2021

This is not 1997

Not that minimum wages are anything new. The USA introduced its Federal Minimum Wage as far back as 1938; although today each state sets its own rate. And the general consensus is that minimum wages help raise wages in general with little or no impact on employment as a whole. The broad theory being that by increasing wages at the bottom – where people’s propensity to spend is higher – we increase demand across the economy. As the economy grows, demand for labour increases and forces wages up still further. And so, demand rises and promotes further growth.Although introduced to the UK by a Labour government, the National Minimum Wage is closer to the Tory approach to economic policy. This is because it passes the costs onto someone other than the state immediately. In this case, Britain’s employers. Labour governments, in contrast, have generally sought the politically easier approach of passing costs onto future generations via public borrowing… which was often the better policy if a combination of inflation and growth served to lower the real cost of the debt even as the state’s ability to repay it became easier.

This was no doubt the outcome desired by Tony Blair and Gordon Brown when they were elected in 1997. After two decades of suppressed wages – first under James Callaghan, and then under Thatcher – and despite the deregulation of the City of London and the increasing revenues from North Sea oil and gas, it was hoped that a legal minimum wage would generate the growth needed to lift people out of poverty. In neoliberal terms, it would “make work pay.”

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Commodities, Supply-Chains and Structural Changes in Demand

July 17, 2021

COMMODITIES, SUPPLY-CHAINS AND STRUCTURAL CHANGES IN DEMAND

Talk of a new commodity super-cycle may be premature
Once GDP growth returns to trend, commodity demand will moderate
Fiscal and monetary relief are key to maintaining growth and demand
Structural changes in energy demand will prove more persistent

As the spectre of inflation begins to haunt economists, many market commentators have started to focus on commodity prices in an attempt to predict the likely direction of the general price level for goods and services. This indexing of the most heterogeneous asset class has always struck me as destined to disappoint. Commodity prices change in response to, often, small variation in supply or demand and the price of some commodities varies enormously from one geographic location to another. Occasionally the majority of commodities rise in tandem but more frequently they dance to their own peculiar tunes.

Commodity analysts tend to focus on Energy and Industrial Metals foremost; Agricultural Commodities, which are more diverse by nature are often left as a footnote. Occasionally, however, a demand-side event occurs which causes nearly all sectors to rise. The Covid-19 event was just such a shock, disrupting global supply-chains and consumer demand patterns simultaneously.

The chart below shows the CRB Index since 1995: –

Source: CRB, Yardeni

This chart looks very different to the energy heavy GSCI Index, which is weighted on the basis of liquidity and by the respective world production quantities of its underlying components: –

Source: S&P GSCI, Trading Economics

The small rebound on the chart above is not that insignificant, however, it equates to a 55% rise since the lows on 2020. The fact that prices collapsed, as the pandemic broke, and subsequently soared, as vaccines allowed economies to reopen, is hardly surprising. Economic cycles wield a powerful influence over commodity prices; short-term, inelastic, supply, confronted by an unexpected jump in demand, invariably precipitates sharp price increases.

…click on the above link to read the rest of the article…

Bone-Chilling WTF Charts of the Collapse in US Demand for Gasoline, Jet Fuel, and Diesel

May 2, 2020

Bone-Chilling WTF Charts of the Collapse in US Demand for Gasoline, Jet Fuel, and Diesel

It started in mid-February for jet fuel and in mid-March for gasoline.

Oil companies are reporting financial fiascos every day: Today Exxon reported its first quarterly loss since 1999 ($610 million), on a “market-related” $2.9 billion write-down. “We’ve never seen anything like what the world is facing today,” CEO Darren Woods said.

On Thursday, Texas-based shale-driller Concho Resources reported a quarterly loss of $9.3 billion, after writing down the value of its oil and gas assets by $12.6 billion.

Also on Thursday, it was reported that Oklahoma-based Chesapeake Energy, a pioneer in shale-drilling, was preparing to file for bankruptcy (what’s taking so long?).

Still on Thursday, Royal Dutch Shell shocked the markets when it announced that it would reduce its dividend for the first time since 1945 (by 66% from $0.47 to $0.16). “The duration of these impacts remains unclear with the expectation that the weaker conditions will likely extend beyond 2020,” the statement said. The already beaten-up shares plunged another 17% in two days. Shares are down 47% year to date.

Earlier in April, among the oil companies that have already filed for bankruptcy, were two high-profile oil drillers, Whiting Petroleum and Diamond Offshore Drilling.

The drama is centered on the collapse in demand for crude oil. Crude oil is primarily used for two purposes: transportation fuel and as feedstock for the chemical industry. Even before the crisis, demand growth has been weak, particularly as transportation fuel in developed countries. But production has been surging, and amid ample and growing supply, prices were already weak, when the coronavirus hit.

Demand for transportation fuel in the US collapsed.

…click on the above link to read the rest of the article…

China Suffers Economic Double-Whammy As Current Global Demand Collapse Follows Earlier Supply Crash

March 29, 2020

China Suffers Economic Double-Whammy As Current Global Demand Collapse Follows Earlier Supply Crash

As the first quarter is about to close, many Chinese factories are still operating below full capacity, have been gradually ramping up production over the last several weeks as government data suggests the country’s pandemic curve has flattened.

But as Bloomberg notes, there is a serious problem developing, one where the virus crisis is locking down the Western Hemisphere, has resulted in firms from Europe and the US to cancel their Chinese orders en masse, triggering the second shockwave that is starting to decimate China’s industrial base.

A manager from Shandong Pangu Industrial Co. told Bloomberg that 60% of their orders go to Europe. In recent weeks, manager Grace Gao warned that European clients are requesting orders to be delayed or canceled because of the virus crisis unfolding across the continent.

“It’s a complete, dramatic turnaround,” Gao said, estimating that sales in April to May could plunge by 40% over the prior year. “Last month, it was our customers who chased after us checking if we could still deliver goods as planned. Now it’s become us chasing after them asking if we should still deliver products as they ordered.”

A twin shock has emerged, one where China shuttering most of its industrial base from mid-January through early March, generated a supply shock. Now, as those Chinese firms add capacity, expecting to be met with a surge in demand from Western companies, that is not the case and is resulting in a demand shock.

“It is definitely the second shockwave for the Chinese economy,” said Xing Zhaopeng, an economist at Australia & New Zealand Banking Group. The pandemic across the world “will affect China manufacturing through two channels: disrupted supply chains and declining external demand.”

…click on the above link to read the rest of the article…

Is an Increase in Demand Key for Economic Growth?

January 11, 2019

IS AN INCREASE IN DEMAND KEY FOR ECONOMIC GROWTH?

Whenever the so-called economy shows signs of weakness most experts are of the view that what is required to prevent the economy sliding into recession is to boost the overall demand for goods and services.

If the private sector fails to increase its demand then it is the role of the government to fill this void.

Following the ideas of Keynes and Friedman, most experts associate economic growth with increases in the demand for goods and services.

Both Keynes and Friedman felt that the great depression of the 1930’s was due to an insufficiency in aggregate demand and thus the way to fix the problem was to boost aggregate demand.

For Keynes, this could be achieved by having the federal government borrow more money and spend it when the private sector would not. Friedman on the other hand advocated that the Federal Reserve pump more money to revive demand.

There is however never such a thing as insufficient demand as such. We suggest that an individual’s demand is constrained by their ability to produce goods. The more goods that an individual can produce the more goods he can demand i.e. acquire.

Note that the production of one individual enables him to pay for the production of another individual. (The more goods an individual produces the more of other goods he can secure for himself. An individual’s demand therefore is constrained by his production of goods).

Observe that demand cannot stand by itself and be independent – it is limited by production. Hence, what drives the economy is not demand as such but the production of goods and services.

In this sense, producers and not consumers are the engine of economic growth. Obviously, if he wants to succeed then a producer must produce goods and services in line with what other producers require ie. consume.

…click on the above link to read the rest of the article…

All US Homes Are Overvalued

June 9, 2018

All US Homes Are Overvalued

Dorothea Lange Children and home of cotton workers at migratory camp in southern San Joaquin Valley, CA 1936

My long time pal Jesse Colombo, now at Real Investment Advice, recently linked on Twitter to a Zero Hedge article, which quoted CoreLogic as saying more than half of American homes are overvalued. CoreLogic calls itself “a leading provider of consumer, financial and property data, analytics and services to business and government.”

Well, CoreLogic is way off. All American homes are overvalued. How can we tell? It’s easy. It’s so easy it’s perhaps no wonder that people overlook the reasons why. But we all know them: The Fed has pushed some $20 trillion down the throats of the financial system. It has also lowered interest rates to near zero Kelvin. Then the government added a “relaxation” of lending standards and an upward tweak of credit scores. And Bob’s your uncle.

These measures haven’t influenced just half of US homes, they’ve hit every single one of them. Some more than others, not every bubble is as big as San Francisco’s, but the suggestion that nearly half of homes are not overvalued is simply misleading. It falsely suggests that if you buy a home in the ‘right’ place, you’ll be fine. You won’t be. The Washington-induced bubble will and must pop, and precious few homes will be ‘worth’ what they are ‘worth’ today.

Here’s what Jesse tweeted along with his link to the Zero Hedge article:

“Almost half of the US housing market is overvalued” – this is why U.S. household wealth is also overvalued/in an unsustainable bubble.

He followed up with:

U.S. household wealth is in a bubble thanks to Fed-inflated asset prices. This is creating a “wealth effect” that is helping to drive our spurious economic recovery. This economy is nothing but a sham. It’s smoke and mirrors. Wake the F up, everyone!!!

…click on the above link to read the rest of the article…

The Oil Curse Comes to Washington

April 27, 2018

The Oil Curse Comes to Washington

Prices rise and prices fall. So, too, they fall and rise. This is how the supply and demand sweet spot is continually discovered – and rediscovered.

When supply exceeds demand for a good or service, prices fall. Conversely, when demand exceeds supply, prices rise. Producers use the information communicated by changing prices to make business decisions. High demand and rising prices inform them to increase output. Excess supply and falling prices inform them to taper back production.

This, in basic terms, is how markets work to efficiently bring products and services to market. Five year plans, command and control pricing systems, and government price edicts cannot hold a candle to open market pricing. But not all markets are created equal. The market for gumballs or garbage bags, for instance, is much simpler than the market for solar panels or jet engines.

What we mean is some markets are subject to more government intervention than others; especially, if there’s a large money stream that can be extracted by government coercion. Sometimes governments nationalize an entire market – for the good of the people, of course.

Strange and peculiar price movements can indicate there’s something else besides natural supply and demand mechanics going on. On April 6, a barrel of West Texas Intermediate (WTI) grade crude oil cost about $62. Ten months ago, that same barrel of WTI oil cost about $43. About 24 months ago, it was only about $30 a barrel.

Yesterday, April 26, WTI oil was about $68 a barrel. What’s going on?

Price Fixing Accidents

Indeed, the oil market is subject to mass government interventions the world over. The push and pull of these hindrances to regular market determined price discovery can prompt wild price distortions. We don’t pretend to understand the many variables at play that influence the price of oil. Still, today, we scratch for clarity and edification, nonetheless.

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Global Gold Investment Demand To Overwhelm Supply During Next Market Crash

November 13, 2017

Global Gold Investment Demand To Overwhelm Supply During Next Market Crash

When the next market crash occurs, global gold investment demand will likely overwhelm supply. When this occurs, we could finally see the gold price surpass its previous high of $1,900. Now, this isn’t mere speculation, as we already have seen this taking place in the past. When the broader markets crashed to the lows in Q1 2009 and the 10% correction in Q1 in 2016, these periods were to two highest quarters of Gold ETF investment demand.

I don’t really care on whether the physical gold is actually in the Gold ETF’s, rather I like to look at it as an important indicator that shows us how much investor fear there is in the market. Moreover, with the amount of leverage and debt now in the system, when the market crashes this time around, it will push gold investment demand up to a record we have never seen before.

The chart below shows the amount of physical global gold investment demand over the past 14 years. As the gold price increased, so did amount of gold bar and coin demand:

As we can see, during the U.S. Banking and Housing Market crash in 2008, gold bar and coin demand doubled to 868 metric tons (mt), up from 434 mt in 2007. That was quite a lot of gold bar and coin demand as it totaled nearly 28 million oz (1 metric ton = 32,150 oz). Furthermore, as the gold price jumped to $1,571 in 2011, gold bar and coin demand shot up to nearly 1,500 mt (48 million oz).

Now, the reason for the huge spike in physical gold investment in 2013 was due to the huge price smash as the gold price fell from nearly $1,700 in the beginning of the year to a low of $1,380 by the middle of April. Investors thought this was a huge sale on gold so demand for bars and coins reached a new record of 1,716 mt.

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Forget Draghi, Crude Matters

June 29, 2017

Forget Draghi, Crude Matters

Despite Mario Draghi’s supposedly misinterpreted comments earlier this week, there are global indications that the best of this round has already been reached. Policymakers are always going to claim things are improving, that much is given. But there is tremendous difference between that and what has occurred, especially if it is indeed rolling over worldwide.

The earliest indicators for China’s economy in June signal that the manufacturing sector may be poised to decelerate, while other challenges loom in the second half of this year.

Small- and medium-sized enterprises showed the lowest level of confidence in 16 months, a gauge of manufacturing drawn from satellite imagery slumped, and conditions in the steel business remained lackluster.

At the center of the story is as always crude oil. There are, of course, direct effects of the ups and downs (more down than up) in the energy market. As the price of it rises there will be more exploration, drilling, production, and transportation required. Some of that has already happened, and accounts for some part of this economic recuperation.

The larger effects are in sentiment, or at least the kind they might measure in PMI’s or surveys. It bears repeating that when the global downturn arrived in early 2015, economists worldwide assured everyone not to worry. They had several plausible reasons for taking that position, flawed as they were. Overall, however, especially from a US perspective the big contrary indicator was WTI.

Dismissing it as a mere “supply glut”, actual economic agents especially in industry would have known better. Even if these important marginal changes weren’t completely understood, it didn’t take any special knowledge or complex series of regressions to link the crash in oil to reduced demand for goods globally. In that way, oil became the best real-time indicator for economic demand and its overall direction no matter what Janet Yellen would say.

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Go Long Chain Makers

March 3, 2017

Go Long Chain Makers

Leonardo da Vinci Head of a Woman 1470s This is turning into a very rewarding series, it opens up vistas I could never have dreamed of. First, in “Not Nearly Enough Growth To Keep Growing”, I posited that peak wealth for the west, and America in particular, was sometime in the early ’70s or late ’60s of the last century.

That led to longtime Automatic Earth reader Ken Latta, who’s old enough to have been alive to see it all, writing, in “When Was America’s Peak Wealth?”, that in his view peak wealth for America was earlier, more like late ’50s to early ’60s, a carefree period for which Detroit provided the design, and the Beach Boys the soundtrack.

And I know, for those who wrote to me about this, that there’s quite a bit of myopia involved in focusing on the US, or even the western world in general, when discussing these things. But at the same time, we’re all at our best when talking about our own experiences, something this thread has made abundantly clear. That said, I would absolutely love to get a view from other parts of the world, China, Latin America, Africa, Eastern Bloc, on the same topic. I just haven’t received any yet.

What I’ve absolutely adored is how -previously- anonymous Automatic Earth readers and commenters have felt the urge to share their life experiences because of what’s been written. This happened especially after Ken’s follow-up to his initial article, “Peak American Wealth – Revisited”, which saw many of his contemporaries, as well as younger readers after I ‘poked’ them, relate their views.

Then there was distinguished emeritus professor Charles A. Hall, who took offense with neither Ken nor I including energy as an explicit factor in determining wealth. Of course he was right. I have the creeping suspicion he often is.

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The Great Malaise Continues

January 3, 2016

The Great Malaise Continues

NEW YORK – The year 2015 was a hard one all around. Brazil fell into recession. China’s economy experienced its first serious bumps after almost four decades of breakneck growth. The eurozone managed to avoid a meltdown over Greece, but its near-stagnation has continued, contributing to what surely will be viewed as a lost decade. For the United States, 2015 was supposed to be the year that finally closed the book on the Great Recession that began back in 2008; instead, the US recovery has been middling.

Indeed, Christine Lagarde, Managing Director of the International Monetary Fund, has declared the current state of the global economy the New Mediocre. Others, harking back to the profound pessimism after the end of World War II, fear that the global economy could slip into depression, or at least into prolonged stagnation.

In early 2010, I warned in my book Freefall, which describes the events leading up to the Great Recession, that without the appropriate responses, the world risked sliding into what I called a Great Malaise. Unfortunately, I was right: We didn’t do what was needed, and we have ended up precisely where I feared we would.

The economics of this inertia is easy to understand, and there are readily available remedies. The world faces a deficiency of aggregate demand, brought on by a combination of growing inequality and a mindless wave of fiscal austerity. Those at the top spend far less than those at the bottom, so that as money moves up, demand goes down. And countries like Germany that consistently maintain external surpluses are contributing significantly to the key problem of insufficient global demand.

At the same time, the US suffers from a milder form of the fiscal austerity prevailing in Europe. Indeed, some 500,000 fewer people are employed by the public sector in the US than before the crisis. With normal expansion in government employment since 2008, there would have been two million more.

…click on the above link to read the rest of the article…

Carnage in US Natural Gas as Price Falls off the Chart

December 19, 2015

Carnage in US Natural Gas as Price Falls off the Chart

All eyes are on Chesapeake.

The price of natural gas in the US has gotten completely destroyed. The process started in July 2008, at over $13 per million Btu and continues through today, at $1.77 per million Btu.

In between, natural gas traded at prices that, for much of the time, didn’t allow drillers to recoup their investments, leading to permanently cash-flow negative operations, and now huge write-offs and losses, defaults, restructurings, and bankruptcies.

You’d think that this sort of financial misery would have caused investors to turn off the spigot, and for production to fall because drillers ran out of money before it got that far.

But no. Over the years, money kept flowing into the industry. In this Fed-designed world of zero interest rate policies, when risks no longer mattered, drillers were able to borrow new money from banks and bondholders and drill that money into the ground, and production soared, and more money poured into the industry based on Wall Street hoopla about this soaring production, and this money too has disappeared.

In the process, the US has become the largest natural gas producer in the world – and the place where the most money ever was destroyed drilling for natural gas.

But now the spigot is being turned off. And much of the industry is heading toward default and bankruptcy. Granted, the largest producer in the US, Exxon, has apparently bigger problems on its global worry list than the misery in US natural gas. Its stock is down only 25% since June 2014, and its credit rating is still AAA. But even if it gets downgraded a couple of notches, Exxon can still borrow new money to fund its operations, dividends, and stock buybacks, and service its existing debt.

But the rest of the industry – along with its investors and banks – is sinking deeper into fiasco.

…click on the above link to read the rest of the article…

Perfect storm heads for fossil fuel assets

November 27, 2015

Perfect storm heads for fossil fuel assets

A natural gas refinery next to a cemetery in New Mexico, US. Image: Christina Xu via Flickr

Coal, oil and gas sectors warned that trillions of dollars of assets could be stranded if a global agreement on limiting climate change is reached at the UN summit in Paris.

LONDON, 25 November, 2015 – The fossil fuel industry may waste as much as US$2.2 trillion (£1.45 tn) in the next decade if it persists in pursuing projects that prove uneconomic in a world beginning to turn its back on carbon.

An independent thinktank, the Carbon Tracker Initiative (CTI), says the industry faces “a perfect storm” of factors, including international action to limit global average temperatures to 2˚C above their pre-industrial level, and rapid advances in clean technologies.

The CTI report says there will be no need for new coal mines, oil demand will peak around 2020, and growth in gas will disappoint industry expectations if world leaders agree and then implement the policies needed to meet the UN commitment to keep climate change below 2˚C − the threshold agreed by most governments.

Next week’s UN climate change conference in Paris will be trying to reach such a global agreement.

Excess of supply

The report warns: “If the industry misreads future demand by underestimating technology and policy advances, this can lead to an excess of supply and create stranded assets. This is where shareholders should be concerned.”

James Leaton, CTI’s head of research and co-author of the report, says: “Too few energy companies recognise that they will need to reduce supply of their carbon-intensive products to avoid pushing us beyond the internationally-recognised carbon budget.

“Clean technology and climate policy are already reducing fossil fuel demand. Misreading these trends will destroy shareholder value. Companies need to apply 2˚C stress tests to their business models now.”

…click on the above link to read the rest of the article…

A Hard Look at a Soft Global Economy

November 24, 2015

A Hard Look at a Soft Global Economy

MILAN – The global economy is settling into a slow-growth rut, steered there by policymakers’ inability or unwillingness to address major impediments at a global level. Indeed, even the current anemic pace of growth is probably unsustainable. The question is whether an honest assessment of the impediments to economic performance worldwide will spur policymakers into action.

Since 2008, real (inflation-adjusted) cumulative growth in the developed economies has amounted to a mere 5-6%. While China’s GDP has risen by about 70%, making it the largest contributor to global growth, this was aided substantially by debt-fueled investment. And, indeed, as that stimulus wanes, the impact of inadequate advanced-country demand on Chinese growth is becoming increasingly apparent.

Growth is being undermined from all sides. Leverage is increasing, with some $57 trillion having piled up worldwide since the global financial crisis began. And that leverage – much of it the result of monetary expansion in most of the world’s advanced economies – is not even serving the goal of boosting long-term aggregate demand. After all, accommodative monetary policies can, at best, merely buy time for more durable sources of demand to emerge.

Moreover, a protracted period of low interest rates has pushed up asset prices, causing them to diverge from underlying economic performance. But while interest rates are likely to remain low, their impact on asset prices probably will not persist. As a result, returns on assets are likely to decline compared to the recent past; with prices already widely believed to be in bubble territory, a downward correction seems likely. Whatever positive impact wealth effects have had on consumption and deleveraging cannot be expected to continue.

The world also faces a serious investment problem, which the low cost of capital has done virtually nothing to overcome. Public-sector investment is now below the level needed to sustain robust growth, owing to its insufficient contribution to aggregate demand and productivity gains.

…click on the above link to read the rest of the article…

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