by Michael Every of Rabobank
The times are not just a-changin’ – they have changed. Let’s take six of the top seven headlines in the Financial Times this morning in Asia as Exhibit A:
- ‘Biden claims oil companies are ‘war profiteering’ as he floats windfall tax’
- ‘The Long View. Is Europe winning the gas war with Russia?’
- ‘Military Briefing: Russia and Ukraine prepare for the rigours of winter war’
- ‘The Big Read. Egypt and the IMF: will Sisi take the economy out of the military’s hands?’
- ‘The nuclear threats that hang over the world’
- ‘Live news updates: Putin says grain deal ‘suspended’ not terminated’’
Do you spot a pattern? War; economic war; war; military; war; economic war. Are you incorporating them into your forecasts? I can assure you that the vast majority of analysts still aren’t because this is apparently ‘exogenous’. If so, what is endogenous is irrelevant. Anyway, on we go into those murky waters, via a mini-edition of the Global D’Oily.
The White House has come out all guns blazing against Big Oil, calling them war profiteers (which the US is no stranger to: **cough** The 2003 Iraq War **cough**), and threatening windfall taxes. President Biden gave a public address and specifically tweeted that: “The oil industry has a choice. Either invest in America by lowering prices for consumers at the pump and increasing production and refining capacity. Or pay a higher tax on your excessive profits and face other restrictions.” Recall when in 2016 I talked of geopolitical ‘Thin Ice’ we could fall through, after which markets would no longer operate the way they used to? Well, it wasn’t just about tariffs: the US is now laying down the law to not only the Russian energy industry, but its own.
Public anger at firms making huge profits during periods of high inflation and low growth is understandable: just wait for high unemployment too and then see how angry the atmosphere gets. Yet saying a private firm can make a fixed % return on the nominally-priced volume of a product it sells --until it exceeds an unclear threshold that is no longer “a fair return on hard work”-- is not neoliberal laissez-faire. The last time we saw that in the US was 1980. (And if we saw it again now, who might be next, as commodity trading house profits echo those of Big Oil?)
The way the tweet is worded, could we see the use of the Defence Production Act to force Big Oil to build more refineries, which will take years to come on line, or key pipelines, including the one which the White House put the kybosh on early in this administration? The industry itself claims aggressive federal regulations aimed at preventing it growing, and in favour of a green transition, are the real culprit. Or is Big Oil expected to directly subsidise energy prices from current profits, as well as to increase production against a backdrop of lower prices? Or might we see export bans, which would make energy cheap in the US, but extortionate elsewhere? Or is this just a sham?
Since the news broke, oil has failed to fall back – which is what has happened in most other economies where governments lean on their energy sectors to “step up” and help the public by “lowering prices at the pump”. Indeed, the Saudis are still pressing ahead with their 500km-long, glass-walled, linear city called Neom, which looks like something from Logan’s Run. (But, I suspect, won’t age as well as the inhabitants of that movie’s city.)
That is despite the looming COP27 summit in Sharm el-Sheikh, Egypt, who got that FT mention today, and are hosting the Green Team while building a new Pharaonic capital city that includes a vast public park in the middle of a desert, backed by earnings from LNG exports. Saint Greta of Thunberg says she, like UK PM Sunak, will not be attending this year because, in so many words, she sees it as ‘Sham el-Chic’ (hat tip to Michael Magdovitz for that one).
Also in the energy mix, the US is to exempt Russian oil loaded before 5 December from its price cap (just to clarify, that’s a price cap on Russian, not US oil), with a deadline of 19 January 2023 before it is imposed on unloaded cargo. How this will all work out in practice also remains to be seen. Sham is very much the word on the energy street.
More deliberate shambles, 90% of Kyiv is now reportedly without running water and/or electricity - and winter is coming. Are we really going to see a modern European city of millions having to see its population melt snow with firewood to get by? Perhaps, yes; or millions of refugees.
On the upside, several ships departed from Ukraine laden with grain yesterday despite the Russian threat of a blockade: that’s some relief for food prices, if so – but let’s wait and see.
Yet given the Eurozone inflation numbers yesterday --October headline CPI was 1.5% m-o-m, taking the y-o-y rate up to a record high of 10.7% vs. consensus estimates of 10.3%, and even core CPI was 5.0% y-o-y-- there may yet be some other Europeans having to rely on firewood in 2023 too.
Sadly, those who think of this is as ‘exogenous’ sadly includes ECB President Lagarde, who gave an interview on Irish television in which she stated the “energy crisis is causing massive inflation,” and that said inflation came from “pretty much nowhere”.
I guess that’s true if you don’t understand the real physical economy, or economic theory, or economic history, or geopolitics, which is true of most of the economics trade. They too specialise in Sham el-Chic