There are warnings almost daily that oil and liquefied natural gas will remain in short supply and prices will rise. Investors should not forget the other side of the coin: aggressive monetary tightening is an emerging threat to demand.
The latest oil report from the International Energy Agency on Wednesday predicted that economic growth, mostly in developing markets, 500,000 barrels per day will create a crude oil shortage subsequent years. Over the past year, the recovery in fuel demand has outpaced the slow growth in production levels. There are no quick ways to produce more. For years producers cut drilling – in the US to boost profits and in Europe to start decarbonizing.
Saudi Arabia and the United Arab Emirates, key members of the Organization of the Petroleum Exporting Countries, can now supply more oil, but are reluctant to act decisively. IEA forecast that non-OPEC producers will add a little less than two million barrels a day in 2022 and roughly the same again in 2023, but it says total OPEC+ production – including that of the cartel’s allies – may shrink partly due to Russian exports fall, New liquefaction facilities are needed to increase global LNG supply. All of this adds up to a persistent shortfall pushing the benchmark up.
But the picture could change rapidly if central bankers rein in their zeal to control inflation.
Higher prices increase the profits of producers but also squeeze citizens and create inflation that upsets central bankers. of the Federal Reserve 0.75 percentage-point increase Its benchmark interest rate on Wednesday set a belligerent tone in the central bank’s fight against inflation. The Bank of England is expected to raise its own benchmark rate by half a percentage point on Thursday.
In theory, central bankers only care about controlling so-called core inflation – which does not include food and fuel. However, monetary policy is not an exact science and bankers need steely nerves to sit on the sidelines as excess fuel inflation pushes headline figures. Given the high debt levels around the world, aggressive action could usher in a recession. If that eases demand for oil and gas enough, it could halt the rally.
Higher fuel prices can also be undermined by users switching to alternatives or cutting back-so called demand destruction, high prices already forced to close some European factories, while, for others, the cost shifts to alternative fuels or increases investment in energy-saving devices. The switching could also enhance the energy security of oil and gas importers, an emerging priority since Russia’s invasion of Ukraine.
For consumers, gasoline prices exceeding $5 per gallon have increased the appeal of electric vehicles. Installing high-efficiency windows, home insulation and modern heating and cooling systems pays off more quickly. Each small change is only done away on demand, but they can add up to a large number, just as American fuel-efficiency standards for cars did after the oil crisis of the 1970s.
The previous commodity supercycle was fueled by almost insatiable demand from China as it grew and built at breakneck pace, but Beijing is now targeting less growth. Other emerging economies have significant room to grow, but a hike in US rates won’t help in the short term. COVID-19 remains a wild card that can affect recovery, especially due to reduced immunity to vaccines.
For now the world is short of oil and LNG. Rising demand will undoubtedly drive prices further, but the continued economic recovery needed to do so seems less certain than ever.
Rising oil prices have helped raise the national average price for a gallon of gasoline to $5 for the first time, and this is adding to inflationary pressures in the US economy. Photo Illustration: Todd Johnson
write to Rochelle Toplensky rochelle.toplensky@wsj.com
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