Global interest rates have begun to jump as the energy crisis builds ahead of the northern winter:
- Global onshore oil inventories are making new all-time lows as the Kpler chart shows
- Saudi Aramco’s CEO warned the world had already lost 2.6bn barrels of oil by August
- In addition, diesel/gasoline supplies have been sharply reduced
- Very little volume is moving from the Gulf; Russia and China have banned exports
A DIESEL SHORTAGE IS ALREADY STARTING TO HAPPEN
Slowly but surely, Wall Street is starting to wake up to the crisis, as the Goldman Sachs chart shows:
- Diesel and distillate demand is critical to the global economy, using 30% of global oil supply
- ~75% goes into transport, but the other 25% has equally vital applications
- It is used in key sectors including commercial, residential and industrial
- And in key applications such as heating, cooking, farming and construction
HIGHER DIESEL PRICES LEAD TO HIGHER INFLATION
Many Wall Street analysts believe that energy prices don’t matter for inflation. But as the Apollo chart shows:
- “Diesel is embedded in the delivered cost of nearly every physical good, from freight and rail to agriculture and construction
- “That means the rise in diesel prices does not stay in the energy line of the CPI
- “It migrates with a lag into core goods and services which … the Fed cannot dismiss as transitory”
Higher diesel prices therefore also push up inflation and interest rates.
This creates a dilemma for the Federal Reserve. It would like to keep interest rates low, to support employment.
But higher inflation will push prices higher in the wider economy, and lead to recession and job losses.
GOVERNMENT BORROWING IS ALSO PUSHING INTEREST RATES HIGHER
Today’s energy crisis is exposing the risk created by governments’ addiction to debt since 2008.
Essentially, they chose to ignore the slowdown in global growth caused by the world’s increasingly ageing populations:
- Rather than taking hard decisions on spending, they simply borrowed more…and more
- As the chart shows, central bank stimulus jumped from $9tn in 2008 to $84tn last month
- Other government borrowing led total global debt to double from$174tn to $365tn
- In turn, as the Institute of International Finance (IIF) report, interest expenses are now soaring
The energy crisis is exposing the risks created by this massive expansion in debt. Interest costs as exploding as the IIF chart shows.
Globally, countries are now spending $3tn on interest costs. The US is now set to spend more on interest expense than on defence.
This adds to affordability concerns. And it risks leading to a feedback loop:
- For example, US voters are getting very upset over the record levels of diesel prices
- So the Administration is trying to talk prices down by discussing export restrictions
- But as the American Petroleum Institute warn, this will simply push prices higher
- The reason is that US refineries will have to cut output as they can’t sell their diesel
Governments are trying to avoid taking the hard decisions that would reduce spending.
So instead, as with a diesel export ban, they risk making today’s bad situation even worse.