High energy prices and inflation: will the onset of the hurricane season make things worse?

 

The impact of the surging crude oil prices, exacerbated by the steep rise in the price of the LNG, liquified natural gas, on the global economy is now all too clear and the policymakers are scrambling for solutions before it reaches the point of no-return.

In inverse proportion to the skyrocketing inflation, the spending power of the Western consumers in particular, and global consumers in general, is steadily shrinking and the major economies are already feeling the pinch: the economy of the United Kingdom, for instance, has shrunk by 0.1% in March, clearly signalling the struggling service sector due to high energy prices; analysts fear the worst for the same during April that is yet to be released.

The picture in the rest of Europe is far from cosy as well, especially when the latter has been forced to look for substitutes for Russian commodities. 

The first clear signal of an impending disaster came, when the stocks of the retail giant, Amazon, fell almost by 24% last month as a result of declining sales, something mainly attributed to the high inflation.

The story did not end there: the bitcoin investors lost billions of dollars on Thursday, May 12; the fall in value ranged from 20% to 100%, with some coins becoming just worthless. 

Some analysts predict that the stock markets and housing markets will follow suit in the coming weeks, unless the inflation is reined in. Without a clear strategy, however, bringing down oil and gas prices, in the current circumstances, is next to impossible.

In an ironic development, meanwhile, Apple and Saudi Aramco went through a role-reversal on Thursday - at least briefly; Saudi Aramco became the world's most-valued company for a few hours, knocking the crown off Apple.

Since the OPEC+ could not address the supply issue in a feasible way to bring down the high energy prices, the US appears to be determined to go for the nuclear option: not only are the authorities going to impose fines on the companies that exploit the energy prices, but also are about to bring in NOPEC legislation in order to hold the OPEC+ accountable for not doing enough.

The major oil consuming nations such as the US, China, India, Japan and South Korea have been releasing their SPRs, strategic petroleum reserves, for months, in order to bring down the crude oil prices, all to no avail. 

The US, meanwhile, is facing yet another serious challenge due to the war in Ukraine: the former has been instrumental in compelling the Europeans to ditch Russian gas and it has been forced to embrace the role of 'provider' for the latter for their needs. 

 

It is easier said than done, though: the EIA, US Energy Information Administration, said last week the challenges faced by the US when it comes to oil and gas production; even the shale sector does not show a significant boom in spite of the obvious high crude oil prices.

In addition, the hurricane season in the Atlantic basin is on the horizon; it is usually active from June to November; the cyclone activity in the region, meanwhile, can potentially begin even before that.

Since there are quite a few US offshore oil fields in the region, analysts are concerned about the impact on the production in the coming months; in 2021, for instance, Hurricane Ida left a trail of destruction that was the worst in 16 years. It did make a serious impact on the global crude oil prices then.

Even if the producers increase the oil output substantially, there are key factors that still could spoil the achievement. The EIA has identified the following factors that affect the oil prices at pumps:

The crisis of the cost-of-living has forced politicians to take harsh measures to mitigate the impact. Boris Johnson, the British prime minister, for instance, is planning to cut over 91,000 jobs in the civil service to make savings in order to pass the latter on to the ordinary people.

In this context, the Ukraine-Russian conflict took place at the worst possible time, because the world just emerged from a once-in-a-century pandemic with a death toll of over 11 million . The former, undoubtedly, will make the existing economic crisis worse in the months to come.

The first ominous sign about a possible, so-called demand destruction came out this week, when data suggests that the US crude stocks fell sharply last week; if it repeats this week, that spells trouble for the energy markets in a significant way - in the near future.