I just wanted to make one quick observation in this post. The price of oil is a leading indicator of recession, possibly even causal. That was true in 2008, it was true in the early Aughts, it was true in the early 1990s, and it was true in the early 80s. It has been true in every recession of the post-war period.
We’re not as dependent on oil, particularly on foreign oil as we used to be. Maybe the recent increase in the price of oil won’t lead to a recession this time.
Why didnt we go into recession last year when prices were really high?
Steve
A good question. The Fed Funds rate was near zero and the spending binge was just getting under way. Quite a bit has changed since then.
I think there is also causal and correlation. You could make the case that in some earlier recessions oil prices caused or helped cause recession. In this case at initial glance it looks like OPEC cutting production due to lower consumption and wanting maintain prices.
Steve
It seems to me the combination of high oil prices and the Fed combatting inflation is a one-two punch that suggests a recession is likely (but not certain).
“We’re not as dependent on oil, particularly on foreign oil as we used to be.”
Yes, but oil is a single global market, and our local price is determined by events overseas. There is also the movement towards Net Zero, which would mandate reductions in the production of all fossil fuels. One hopes that sanity will prevail.
Are we still importing Russian diesel? We were until very recently, despite the sanctions on Russian oil and gas.
Biden has drawn down the Strategic Reserve by 35% this last year to 372 million barrels (Mbbl), which is about half capacity. See,
https://www.energy.gov/ceser/spr-faqs
“Oil can be pumped from the Reserve at a maximum rate of 4.4 million barrels per day for up to 90 days, then the drawdown rate begins to decline as storage caverns are emptied. At 1 million barrels per day, the Reserve can release oil into the market continuously for nearly a year-and-a-half.”
Note that 1 Mbbl/d would eliminate the SPR in about 1 year. So would 4.4 Mbbl/d for 90 days. Not all of the oil in the reserve can be recovered.
OPEC+’s Gulf members are cutting output, which supports Russia’s previous cuts of about 500,000 bbl/d. Another 1.6 Mbbl/d are coming off the market.
Saudi Arabia is leading this policy, and the Persian Gulf region is realigning with the Russia-China axis. See M. K. Bhadrakumar at:
https://www.indianpunchline.com/opec-saudis-arent-afraid-of-us-anymore/
Whatever the outcome of the Ukrainian War, the World will be a very different place next year. And Russia-China will be the main beneficiaries.
“Why didnt we go into recession last year when prices were really high?”
Actually, its not a good question. Its a very poor question. Economies don’t turn on a dime. But high gas prices accelerated the depletion of consumer spending power, especially the run up in credit card debt.
Look at the recent manufacturing output report, and the jobs report. We are headed south. You simply can’t have real wages in steady decline an maintain purchasing power, which drives an economy. But that doesn’t mean it happens by next Tuesday.
I interpreted the significance of the announcement not based on its potential impact of the economy; but its signal as to which actors control the supply side equation of the oil market.
The fact the Saudis announced the cut and knew the US didn’t have a policy response is very different from the 2014-2020 era. I recently saw some pretty credible analysis that shale oil is likely peaking in the next couple of years, the only significant new potential capacity is in the Permian of approximately few hundred thousand barrels. If that plays out, the US will becoming more dependent on foreign oil as the decade goes on. The implication going forward is the US’s ability to affect energy markets will be on the demand side, and that Opec is in the driver seat in the supply of oil, and the geopolitical results from that (can the US really disengage from the Mideast?)
Saudi Arabia is the low cost producer with very large reserves. As such it has the ability to influence prices.
Agree that Saudi Arabia will always have the ability to influence price due to its reserves; but note the change in behavior.
In 2014-2020; Saudi Arabia repeatedly tried to crash the price of oil to maintain market share in the face of surging US oil production. Now they have unilaterally cut supply twice in 4 months to maintain oil prices — without fear that the US will take that market share.
But from 2014-2020 they didnt have Russia to support their efforts. We are already the largest oil producer in the world, however, if the Saudis suddenly cut their oil production we do not have, and never will have, the ability to immediately ramp up production enough to make up for a large cut.
“Its a very poor question.”
But oil prices came back down pretty quickly. They were significantly over $80/barrel for what, 7-8 months? Inflation adjusted it has been running well below the peak in the Bush years and below the first couple of Obama years and below the first 3 Reagan years. The recent increase looks to me like oil broke that $80 barrier so OPEC responded. IOW I dont think cause and effect are so clear here.
https://www.macrotrends.net/1369/crude-oil-price-history-chart
Steve
The first paragraph is a restatement that there are consequences if one alienates all the major oil suppliers in the world AND has no credible supply side solutions if they bunch up together, so yes I agree.
As to the rest, I am ambivilent on prices in the next few months. But the medium / long term trend of decreasing domestic supply combined with increasing reliance on Mideast energy have great implications.