Finally, central banks are waking up to the inflation risks created by rising oil and product prices. As leading analyst Rachel Ziemba warns:
“Oil product prices are a better metric of the pain than crude oil prices, because they’re in shorter supply, and also because those are the products that people and companies are actually using.”
Policymakers had thought they could control these risks by keeping oil prices below $100/bbl.
But consumers and industry buy oil products and their prices are continuing to rise. And as Vitol’s CEO warned last week:
“There has been a loss of about 2mbd of refined-product exports from the Middle East and a further 2mbd from Russia”. And so, as Bloomberg report:
“In Europe, drivers are now paying the equivalent of more than $370 a barrel for gasoline and diesel at the pump”.
Now investors have started to notice, with the 10-year interest rate back near 5% Covid-era highs, as the chart shows.
US PUMP PRICES ARE MOVING HIGHER, AGAIN
The issue is well-known to anyone who remembers previous oil crises, as we noted last week:
“Our economy runs on oil. And so higher prices for gasoline, diesel, bunker fuel and distillates feed straight through to consumers and industry.”
In turn, as Abolute Strategy Research warn:
“If gasoline stays where it is for the next six months, US headline inflation should rise to 4.9% — a level that would more or less force the Federal Reserve to raise rates”.
By then, of course, demand destruction will have begun to take place, as we warned back in July. And the economy will have inevitably moved into recession.
RISING FUEL COSTS CREATE POLITICAL RISK
For the moment, the stock market is ignoring this risk as it focuses on the AI bubble.
But last week’s Labor Day holiday marks the final stage of campaigning for the mid-term elections, as we noted last month:
- “Normally the governing party would expect to lose seats
- Today’s rising energy prices, plus AI-related stock market volatility, might well increase the losses
“The next few weeks may therefore see political worries start to increase, alongside energy and financial market concerns.”
Today, President Trump’s approval rating “has fallen to its lowest level so far“, as the Financial Times opinion poll confirms:
“The survey comes as the president appears unable to end his war in Iran, which has driven up US borrowing costs and prices for fuel and consumer goods over the past six months”.
VLCC FREIGHT RATES ARE SOARING AS SHIPPING IS ATTACKED
Worryingly, the risks also seem to be escalating. Wednesday saw 15 attacks on shipping in the Strait of Hormuz by Iran and the USA, as Reuters reports:
- “IRGC says it attacked 10 ships, including two US vessels and eight oil tankers
- US military says it destroyed five Iranian oil tankers”
Even more worrying is last week’s joint warning from the 18 shipping superpowers.
They note that the principles of free navigation and the neutrality of commercial vessels are breaking down:
“When shipping supply chains fragment, the global economy fragments with it.”
Policymakers lost touch with the real world as their stimulus programmes – $353tn, 305% of global GDP – drove global debt to record levels after 2008.
But now, the energy crisis is forcing them to face up to a very painful reality. Consumers, companies and investors are paying the price for their folly.