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The Real Goal of Fed Policy: Breaking Inflation, the Middle Class or the Bubble Economy?

“There is no sense that inflation is coming down,” said Federal Reserve Chairman Jerome Powell at a November 2 press conference, — this despite eight months of aggressive interest rate hikes and “quantitative tightening.” On November 30, the stock market rallied when he said smaller interest rate increases are likely ahead and could start in December. But rates will still be increased, not cut. “By any standard, inflation remains much too high,” Powell said. “We will stay the course until the job is done.”

The Fed is doubling down on what appears to be a failed policy, driving the economy to the brink of recession without bringing prices down appreciably. Inflation results from “too much money chasing too few goods,” and the Fed has control over only the money – the “demand” side of the equation. Energy and food are the key inflation drivers, and they are on the supply side. As noted by Bloomberg columnist Ramesh Ponnuru in the Washington Post in March:

Fixing supply chains is of course beyond any central bank’s power. What the Fed can do is reduce spending levels, which would in turn exert downward pressure on prices. But this would be a mistaken response to shortages. It would answer a scarcity of goods by bringing about a scarcity of money. The effect would be to compound the hit to living standards that supply shocks already caused.

So why is the Fed forging ahead? Some pundits think Chairman Powell has something else up his sleeve.

The Problem with “Demand Destruction”

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The Diesel Crunch Is Finally Causing Demand Destruction

November 26, 2022

The Diesel Crunch Is Finally Causing Demand Destruction

Diesel inventories slumped to their lowest level for the time of the year since 1951.
signs have emerged that weaker demand in the past weeks may have slowly started to rebuild diesel inventories.
Refiners are processing more crude oil to capture the still high refining margins.

High prices seem to have started to weigh on diesel demand in the United States, where distillate inventories – comprising diesel and heating oil – have been slowly rising over the past few weeks. American distillate inventories are still below the five-year average, but the gap in stocks compared to previous years has slowly started to narrow, suggesting that high prices are hitting demand, while encouraging more refinery output thanks to solid refining margins.

In this week’s inventory report, the U.S. Energy Information Administration said that distillate stocks rose by 1.7 million barrels in the week to November 18, with production rising to an average of 5.1 million barrels per day (bpd). Distillate fuel inventories are still about 13% below the five-year average for this time of year, but two months ago, they were more than 20% below the five-year average for that time of the year.

Earlier this autumn, U.S. distillate stocks slumped to their lowest level for this time of the year since 1951, just as the heating season started and a few months ahead of the EU embargo on Russian oil product imports, which goes into effect in February.

Now signs have emerged that weaker demand in the past weeks may have slowly started to rebuild diesel inventories, contrary to seasonal trends. Distillate inventories in the U.S. rose by 3 million barrels in the six weeks to November 18, according to estimates by Reuters’ senior market analyst John Kemp based on EIA data.

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Just a hint from the mainstream that limits precipitate rising oil prices

May 16, 2022

Just a hint from the mainstream that limits precipitate rising oil prices

Last week a Bloomberg writer at the very end of an article explained that the “only solution” to high gasoline and diesel prices is recession. While I would not accuse the writer of advocating degrowth—this would be too radical for a mainstream business publication—his analysis points to a key and obvious cause of today’s high prices for oil and other commodities: There isn’t enough of them to go around.

There’s an old saying in the oil industry that the solution to high prices is high prices. The logic is that high prices will do two things: 1) Reduce demand as those who cannot afford oil products at high prices will cut back and 2) incentivize more exploration and production as companies seek to increase production to take advantage of high prices.

The big question today is whether the second mechanism can actually ramp up oil production enough to bring down prices. In a recent survey a large number of oil executives said their production plans do not depend on current prices. Many cited the desire of investors in publicly traded companies to receive larger dividends and benefit from the corporate buyback of shares (which tends to increase the stock prices as fewer shares are available for trading).

It’s instructive that 9 percent of those responding to the survey cited an oil price of $120 per barrel as the level at which they would consider raising production. And keep in mind that they are NOT talking about $120 per barrel for a few months, but as an average price over many years—since it can take many years to bring large projects into production and those projects can produce for many years after production begins…

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Has Gasoline Price Shock Triggered Demand Destruction Yet? And Where Will Gasoline Prices Go from Here?

April 20, 2022

Has Gasoline Price Shock Triggered Demand Destruction Yet? And Where Will Gasoline Prices Go from Here?

There’s some demand destruction. But oil bounced again, gasoline might be next. My guess is a long-drawn-out zigzag higher.

Following the dizzying spike in gasoline prices, the question arises when demand destruction will set in, where people start driving less, start taking it easier to conserve gas when they do drive, or start prioritizing the most economical vehicle in their garage. If enough people do it, demand begins to decline, and gas stations have to compete for dwindling business. Demand destruction is what would cause the price to come down again. Are we there yet?

The Energy Department’s EIA measures consumption of gasoline in terms of barrels supplied to the market by refiners, blenders, etc., and not by retail sales at gas stations. The volume of gasoline supplied has fallen for the third week in a row. This is unusual this time of the year, when gasoline consumption normally rises through the summer.

The EIA reported on Thursday that gasoline consumption fell to 8.61 million barrels per day in the week ended April 8 on the basis of a four-week moving average (red line), the lowest since March 4, down 2.3% from the same period in 2021 (black line) and down 8.1% from the same period in 2019 (gray line).

Consumers began to react in January.

Note how the past 11 months (red line) tracked the pre-Covid period three years earlier very closely (gray line) until they began to diverge sharply, not just in March, but already in mid-January, and have been solidly below the 2019 level ever since.

Gasoline prices started shooting higher from collapsed levels in April 2020. By May 2021, the average price of gasoline, all grades combined, breached $3.00 a gallon, a multi-year high, and kept going…

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A World That’s More Expensive Is Starting to Destroy Demand

March 28, 2022

A World That’s More Expensive Is Starting to Destroy Demand

Buyers are balking at high prices for fuel, food and metals, threatening to tip economies back into recession.

The Central de Abastos Market in Mexico City.

Photographer: Alejandro Cegarra/Bloomberg

Prices for some of the world’s most pivotal products – foods, fuels, plastics, metals – are spiking beyond what many buyers can afford. That’s forcing consumers to cut back and, if the trend grows, may tip economies already buffeted by pandemic and war back into recession.

The phenomenon is happening in ways large and small. Soaring natural gas prices in China force ceramic factories burning the fuel to halve their operations. A Missouri trucking company debates suspending operations because it can’t fully recoup rising diesel costs from customers. European steel mills using electric arc furnaces scale back production as power costs soar, making the metal even more expensive.

Global food prices set a record last month, according to the United Nations, as Russia’s invasion of Ukraine disrupted shipments from the countries that, together, supply one-quarter of the world’s grain and much of its cooking oil. More-expensive food may be frustrating to the middle class, but it’s devastating to communities trying to claw their way out of poverty. For some, “demand destruction” will be a bloodless way to say “hunger.”

Source: Bloomberg

In the developed world, the squeeze between higher energy and food costs could force households to cut discretionary spending – evenings out, vacations, the latest iPhone or PlayStation. China’s decision to put its top steelmaking hub under Covid-19 lockdown could limit supply and push up prices for big-ticket items like home appliances and cars. Electric vehicles from Tesla Inc., Volkswagen AG and General Motors Co. may be the future of transportation, except the lithium in their batteries is almost 500% more expensive than a year ago.

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Demand Destruction Has Begun

March 26, 2022

Demand Destruction Has Begun

One month ago, Brent jumped above $100/bbl for the first time in eight years as Russia executed a full-scale invasion of Ukraine, and it became clear that western governments would impose sanctions. The oil market has been in triple digits for practically the entire time since.

And, after a month of oil prices we have not seen in nearly a decade and weeks of record-high fuel prices, JPMorgan has published a research report (available to pro subs) which finds that high-frequency data suggest that consumers are beginning to react resulting in what the Fed has desperately wanted to achieve all along: commodity demand destruction.

That said, high prices are clearly not the only demand-destructive force in the world at the moment, however. The crisis in Ukraine, crippling financial sanctions in Russia, and the continued spread of the highly infectious Omicron variant in China have an even more direct impact on regional fuel consumption than high prices.

As a result, JPMorgan has cut 1.1 mpd off its 2Q22 demand forecasts, followed by about 0.5 mbd cuts to both 3Q and 4Q. On net, this trims 420 kbd on average from the bank’s expectations for 2022 global oil demand as high prices, COVID restrictions, and geopolitical conflict drive demand destruction in Russia, China, India, and Europe.

While the US has been relatively isolated so far (despite the highest gasoline prices on record), JPM’s demand revisions are heavily concentrated in Europe, which remains the epicenter of the geopolitical shock. Since the start of the Russia-Ukraine war, the bank’s economists have downgraded the growth in the region by over 2%-pts and have raised inflation forecasts by nearly 3%-pts.

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Energy Demand Destruction Will Lead To Global Recession, Tellurian Chairman Warns

October 29, 2021

Energy Demand Destruction Will Lead To Global Recession, Tellurian Chairman Warns

One month ago, Goldman said that the one thing that could accelerate the resolution of Europe’s energy crisis was plain, simple “demand destruction” – i.e., a plunge in demand due to prices that were too high until the reduced demand leads to less supply and a lower price. Specifically, Goldman estimated “that the potential capacity for gas-to-oil substitution could be larger should gas rally further, of up to 1.35 mb/d in power and 0.6 mb/d in industry (in Asia and Europe), although such a large demand boost would prove too large for the oil market to absorb, leading to a spike in prices to in turn achieve oil demand destruction, the ultimate solution to widespread energy scarcity.”

There is just one problem with this: “demand destruction”, i.e., forcible shutdown of manufacturing facilities has direct cost on output.

And as Charif Souki, Executive Board Chairman at U.S. LNG developer Tellurian, said at the online IEF gas forum, the demand destruction that results from high natural gas prices could lead to global recession.

“We are dealing not with a gas crisis, the gas is simply the leading horse, but we are dealing with an energy crisis”

Echoing what Goldman said a month ago, Souki said that the first manifestation of demand destruction is a switch from one fuel to another.

“But if all fuels become too expensive then you ask people to start changing their lifestyles, start driving less, turning off the lights more often, not putting the air conditioning on, not heat your home.”

“My great fear is the lack of planning is going to lead us to global recession.” He also added that having adequate gas storage is “critical” as is investment in infrastructure.

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The Chilling Things Delta Said about the Airline Business, the 90% Collapse in Q2 Revenues, and Why Some Demand Destruction May Be “Permanent”

June 11, 2020

The Chilling Things Delta Said about the Airline Business, the 90% Collapse in Q2 Revenues, and Why Some Demand Destruction May Be “Permanent”

Shares go to heck after the mother of all revenue-warnings, plunge 20% in two days, including 7% after hours. Its disclosure confirms Buffett’s decision to dump his airlines in mid-crash.

Delta Airlines came out with the mother of all revenue-warnings when it said in an SEC filing this morning that its revenues in the second quarter, ending June 30, would collapse by 90% compared to the second quarter last year.

In addition to the collapse of demand, it has “experienced significant ticket cancellations” (refunds are counted as negative revenues), and it has waved change fees, which used to be a big profit center, and it is giving out “other refunds,” and they all “have negatively affected our revenues and liquidity, and we expect such negative effects to continue.”

And it cannot predict the effects of this unpredictable future, not even the near-term effects. “The longer the pandemic persists, the more material the ultimate effects are likely to be,” Delta said. “It is likely that there will be future negative effects that we cannot presently predict, including near term effects.”

It added a slew of dismal data points and warnings, along with the hoops it has already jumped through and still needs to jump through to stay in business, including billions of dollars in help from the taxpayer. It was a doom-and-gloom report that not even a sworn doom-and-gloomer would have been able to imagine not too long ago.

Delta’s shares dropped 7.4% during regular hours, and another 7.0% after hours, to $29.40, after having already dropped 7.6% yesterday. It seems, some people knew yesterday what Delta would announce this morning. Over those two days combined, including after hours today, shares have plunged 20.3%.

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Unprecedented Demand Destruction Marks The Return Of The Super Contango

April 2, 2020

Unprecedented Demand Destruction Marks The Return Of The Super Contango

Super Contango

These days, every corner of the oil market is “unprecedented”—from the demand destruction to the supply surge and the resulting glut. The oil futures curve is no exception and is also in a state never seen before. This is the super contango, the market situation in which front-month prices are much lower than prices in future months, pointing to a crude oil oversupply and making storing oil for future sales profitable.

The last time a super contango appeared on the market was during the previous glut of 2015. During the peak of the 2008-2009 financial crisis, the super contango hit a record—the discount at which front-month futures traded compared to longer-dated futures was at its highest ever.

The double supply-demand shock of the past month threw the oil futures market into another super contango. And this super contango is already beating previous records.

The super contango is representative of the state of the oil market right now: the growing glut with shrinking storage capacity as oil demand craters, OPEC’s leader and the world’s top exporter, Saudi Arabia, intent on further cratering the market with a supply surge beginning this month. Storage costs are surging, and so are costs for chartering tankers to store oil at sea for future sales when traders expect demand to recover from the pandemic-hit plunge.

The market structure flipped into contango in early February, when the Chinese oil demand slump in the coronavirus outbreak led to lower estimates for oil consumption. A month and a half later, oil consumption is set to plunge by 20 million bpd, or 20 percent, this month. Add to this the Saudi supply surge, and here we have what analysts expect to be the largest glut the oil market has ever seen.

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IEA Asks Majors Oil Producers To Boost Production

October 5, 2018

IEA Asks Majors Oil Producers To Boost Production

Rising oil prices are hurting consumers, Fatih Birol, the Executive Director of the International Energy Agency (IEA), says, calling on major all producers to do the best they can to further boost production and ease persistent supply concerns that pushed Brent Crude to above $86 a barrel on Wednesday.

“Some countries have been making efforts to increase production but this is far from comforting the markets right now,” Birol told the Financial Times on Thursday, adding that his “hope is that all the producers are aware of the sensitive situation and make their best efforts.”

Although higher energy prices may look like a boon for oil exporting countries today, tomorrow the economies of oil exporters will also suffer because of the lower demand growth stemming from high oil prices, Birol told FT.

In an interview with Reuters, also today, Birol said that:

“It is now high time for all the players, especially those key producers and oil exporters, to consider the situation and take the right steps to comfort the market, otherwise I don’t see anybody benefiting.”

Earlier this week, the IEA chief also took to Twitter to comment on the oil price rally in recent weeks and its implications on global economy.

“Rising oil prices are hurting consumers & economic growth prospects today – globally but particularly in the emerging economies – but in a rapidly changing energy world could also have implications for producers tomorrow,” Birol tweeted on Tuesday. Related: A New Era Of LNG Megaprojects

U.S. President Donald Trump has also used Twitter several times this year to slam OPEC for keeping oil prices too high.

Birol’s comments on oil prices and what oil producers should do come just after Saudi Energy Minister Khalid al-Falih said earlier this week that Saudi Arabia would be pumping 10.7 million bpd in October—just below the Kingdom’s highest-ever production level—and would slightly raise production volumes in November.

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OPEC’s Dilemma: Demand Destruction Or Production Boost

June 5, 2018

OPEC’s Dilemma: Demand Destruction Or Production Boost

The early signs of discontent and demand destruction could be forcing OPEC’s hand, but increasing production carries its own risks.

OPEC and Russia are considering raising oil production in a few weeks’ time, and while much of the focus has (rightly) been on the supply outages in Venezuela and the potential for disruptions in Iran, the prospect of demand destruction also looms large for the cartel and its partners.

Oil forecasters had been predicting a blistering oil demand growth for 2018. But lately, those bullish forecasts are not looking quite as good, precisely because oil prices had climbed to their highest level in more than three years. For instance, in May the International Energy Agency revised down its forecast for demand growth for 2018 from 1.5 million barrels per day (mb/d) to 1.4 mb/d.

But a growing list of other signs should cause OPEC some concern, and might ultimately push the disparate members of the group into agreeing on higher output.

A nationwide truckers’ strike in Brazil paralyzed the country. Truckers were outraged by the soaring cost of fuel. The expense is made worse by the fact that Brazil’s currency, the real, has declined significantly this year, doubling the pain for motorists in the country. The strike led to enormous damage to the agricultural sector, and led to shortages of a wide array of basic goods. The country’s GDP is expected to take a significant hit.

That strike was followed up by an oil workers’ strike, which forced the temporary shutdown of a series of refineries. The workers, as well as the truckers and a wide swathe of the country, are outraged about the cost of fuel, and they demanded an end to the more market-based pricing for gasoline and diesel that was introduced several years ago.

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Demand destruction and peak oil

June 5, 2016

Demand destruction and peak oil

Roger Baker is a transportation and energy reform advocate based in Austin, Texas. Long time member of ASPO, we actually met at one of the first ASPO conferences, the one held in Pisa, in 2006. Here he discusses the current situation with crude oil and the global economy.

We are fully under the influence of petroleum demand destruction. The global oil market can’t function without real oil production price discovery, which doesn’t exist in the currently deflationary global economy, which forces indebted producers to sell far below cost.

Both supply and demand seem to cyclic in nature and we are not finished with the supply destruction phase, which can only be revived through a globally realistic oil trading price, which nobody knows. This is an unknown until demand destruction also runs its course. The global demand in the oil supply-demand balance that sets the global oil price cannot be known until we can understand where the global economy is headed. The global material economy seems to be contracting as the Baltic dry index, trucking, and railroad profitability seem to affirm, even ignoring oil prices and Chinese economy.

The reality is probably that a falling EROEI and the end to cheap oil after ~2005 made our finance capital investment growth less profitable. But this fundamental shift has been hidden through easy central bank credit and fiat currency generated on demand to pay interest on a growing mountain of unpayable debt, with a shift of debt from private hands to public, such as away from Wall Street toward Fed and US Treasury obligations. Now we see the world’s major central banks each independently creating their own fiat currencies to preserve a trading advantage, led by the dollar as the world’s standard reserve currency.

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Peak Oil Ass-Backwards (part 2): Crashing OilPrices Aren’t Due to an Oil Glut But to DemandDestruction and Peaking Credit

September 14, 2015

Peak Oil Ass-Backwards (part 2): Crashing Oil Prices Aren’t Due to an Oil Glut But to Demand Destruction and Peaking Credit

As I began to mention at the end of the first part of this three-parter, I’ve only just recently come to the conclusion that oil prices aren’t going to have a tendency to rise due to the tightening of supply imposed by peak oil, but to depreciate. This of course flies in the face of the common logic of supply and demand, but when factoring in the method by which the majority of our money is created, a deflationary effect can be seen to come into play. This has taken me an absurdly long time to clue into, for although I’d steadfastly amassed a bunch of pieces (various information), I hadn’t realized they were actually all part of the same puzzle.

With peak oil and fractional-reserve banking being the first two pieces of this puzzle, the third piece that I needed to factor in (which oddly enough I’d already written about) is the fact that money is a proxy for energy. As I wrote in a previous post, Money: The People’s Proxy,

Simply put,… the core function of money is that it enables us to command energy – the energy used to move our bodies with, to power our machines, to feed to domesticated animals whose energy we then use to do work (which nowadays generally means entertaining us), etc. In other words, it might be tough and/or inconvenient, but one can get by without money. You can’t get by without energy.

In other words, at their core, our economies don’t run on money, they run on energy. Moreover, it doesn’t even really matter what you use as your form of currency – coins, pieces of paper, gold, zero and one digibits, conch shells, whatever – because if you don’t have the energy to perform the work and/or create the products your society expects, the money is virtually useless and worthless.

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The Archdruid Report: Déjà Vu All Over Again

December 19, 2014

The Archdruid Report: Déjà Vu All Over Again.

Over the last few weeks, a number of regular readers of The Archdruid Report have asked me what I think about the recent plunge in the price of oil and the apparent end of the fracking bubble. That interest seems to be fairly widespread, and has attracted many of the usual narratives; the blogosphere is full of claims that the Saudis crashed the price of oil to break the US fracking industry, or that Obama got the Saudis to crash the price of oil to punish the Russians, or what have you.

I suspect, for my part, that what’s going on is considerably more important. To start with, oil isn’t the only thing that’s in steep decline. Many other major commodities—coal, iron ore, and copper among them—have registered comparable declines over the course of the last few months. I have no doubt that the Saudi government has its own reasons for keeping their own oil production at full tilt even though the price is crashing, but they don’t control the price of those other commodities, or the pace of commercial shipping—another thing that has dropped steeply in recent months.

What’s going on, rather, is something that a number of us in the peak oil scene have been warning about for a while now. Since most of the world’s economies run on petroleum products, the steep oil prices of the last few years have taken a hefty bite out of all economic activities. The consequences of that were papered over for a while by frantic central bank activities, but they’ve finally begun to come home to roost in what’s politely called “demand destruction”—in less opaque terms, the process by which those who can no longer afford goods or services stop buying them.

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