Woman pumps gas outside the Wawa shop window
Energy prices are rising and the economy is already feeling the pinch of higher fuel costs, although it is still a long way from stalling.
There is an unusual coincidence of much higher oil, natural gas and coal prices combined with other rising raw materials and supply chain disruptions. This perfect storm of scarcity and higher prices begs the question of whether the economy could plunge into a serious slump or even into a recession.
Economists say the price spike isn’t the kind of oil shock that’s negatively impacting US growth for now, but higher energy costs will have economic repercussions, especially in countries like Europe, where natural gas prices have skyrocketed.
“Periods when oil prices are trending are usually not a problem,” said Bruce Kasman, chief economist at JPMorgan. “The periods of rising oil prices are usually what get you in trouble. They are usually supply-side and tend to have disruptive elements that are broader in terms of their potential barriers to growth.”
“We have a surge in energy that will hold back growth in the fourth quarter,” he added. “We are not warning of a recession, but at a point where you need to worry that it will affect growth significantly.”
American consumers are already paying for gasoline, and heating and electricity bills could continue to rise this winter. Oil prices are up more than 65% so far this year, while natural gas prices have increased more than 112% since January.
“We expect GDP growth in the range of 4 to 6% … We would have to see a massive doubling and tripling of oil prices for this to be so negative that we … move to negative growth,” said Anwiti Bahuguna, head of the Multi-asset strategy at Columbia Threadneedle.
Since last October, gasoline prices have risen about $ 1.10 per gallon and are now at $ 3.27 per gallon unleaded, according to the AAA. Oil prices were depressed and even turned negative as the pandemic stalled the economy in 2020. Now predictions for $ 100 worth of oil are becoming more common as West Texas intermediate oil futures trade above $ 80 a barrel for the first time since 2014.
“The difference is that normally oil leads an energy crisis, but in this case it’s the tail wagging natural gas, coal and renewables,” said Daniel Yergin, vice chairman of IHS Markit. “Oil replenishes to make up for the fact that [liquified natural gas] is maxed out and the wind in Europe was much lower than normal. “
Trouble in the energy markets
Yergin said oil is likely to remain under pressure and within a few months about 600,000 to 800,000 barrels per day could be used as a substitute for natural gas in Europe and Asia, where supplies are scarce. Oil can be substituted for power generation and in some manufacturing areas.
Citigroup predicts a winter price shock that could see natural gas prices average over $ 30 per million British thermal units in the fourth quarter and over $ 32 in Asia. However, Citi energy analysts also say that if the winter is very cold, up to $ 100 million. By comparison, US natural gas futures are currently trading at $ 5.25 per mmBtu.
Coal prices have also risen and supplies are scarce, leading to a power shortage in China. The country burns coal to produce electricity, but inventories of its power plants were at a 10-year low in August. That has also increased the demand for natural gas.
“While China clearly needs as much coal as it can get its hands on to get you [fourth-quarter] Slowdown due to the tyranny of power shortages has held geopolitical tensions with Australia the most convenient source of high calorific coal from Down Under, “Vishnu Varathan, head of Asia and Oceania economics and strategy at Mizuho, said in a recent note.
Economists say that the rise in energy prices would have to be stronger and much longer to trigger a recession.
Looking at past periods when prices rose sharply, Bernstein’s energy analysts found that recessions followed periods when energy costs stood at 7% of global GDP, as in October.
They find that if energy costs remain above this level for more than a year, the likelihood of a recession increases.
“While the recent increase in energy costs may prove temporary, it is a protracted period in energy costs [greater than a year] or a further rise in the price of oil to over US $ 100 / barrel could trigger a slowdown in global economic growth as disposable income becomes scarce, ”wrote Bernstein analysts.
Although the share of energy costs is the highest in nearly a decade, it is still 5.2% of GDP in 2021 on an annual basis, and that is not yet a dangerous level, they added.
“Annual energy costs as a percentage of GDP are above the 30-year average of 4.4%, but below that of 1979 or 2008, when annual energy costs reached over 7% of GDP,” the Bernstein analysts write. “If the rise in energy prices proves to be temporary, the risk of an energy-induced recession remains low.”
USA as a producer
The changes in the US energy industry over the past two decades have shielded some of the current global energy crisis.
Mark Zandi, chief economist at Moody’s Analytics, said the blow of a surge in energy prices is not all negative as the US is now a large energy producer. The US produces approximately 11.3 million barrels a day and exports oil and refined products.
Despite its enormous production, the US remains an importer of crude oil, producing an average of 3.8 million barrels a day for four weeks, according to the latest weekly data from the Energy Information Administration.
The US supplies natural gas to Europe and Asia in the form of LNG exports, but US gas prices are tied more to the domestic market and have been increased as US supplies remain lower than normal for this time of year.
Zandi said the dominance of the US energy industry as prices rise is also having a positive impact on the energy-producing parts of the economy.
“That doesn’t mean that higher energy prices wouldn’t cause a recession in certain scenarios,” he said. “It’s just far less likely, and it would require much higher prices than in the past.”
Zandi said every penny that increases the cost of a gallon of gasoline costs US consumers $ 1 billion. If it goes up $ 1 like last year, that’s about $ 100 billion.
Another $ 1 jump would be detrimental.
“That’s $ 100 billion, only half a percent of GDP. It would do harm. It would ruin the economy, but I don’t think it would derail, ”he said. “If it went down to $ 5.25, that’s $ 200 billion. That’s one percent of GDP. If energy prices go up like this, other prices will likely go up. “
The immediate effect of higher energy costs is higher inflation, which weighs on consumer spending.
Kasman said the rise in energy prices since last week would add about 2.5% to the consumer price index in the fourth quarter if prices stayed at those levels. That could put a half a percentage point or more pressure on GDP, he noted.
“This is not small, but it is not a recession,” he said. Kasman said he expected the global economy to be fairly strong next year, but the higher energy costs give cause for concern that purchasing power could still be hurt enough, which could hurt growth.
Kasman said the higher the prices the worse the impact. JPMorgan economists conducted an analysis in which they predicted a further 50% increase in energy prices.
“In this scenario, in which crude oil prices quickly rise above 100 US dollars / barrel, the shock for US incomes is very great – since CPI inflation is raised by 10 percentage points over the year – almost twice as much as strong as the impact we estimate for the euro area, ”they said in a note. “While this scenario doesn’t seem likely, it is important to understand the threat posed by the combination of supply shocks that are now rocking the global economy.”
JPMorgan forecasts fourth quarter GDP growth of 3.5% and now expects third quarter growth of 4% compared to an earlier forecast of 8%. The company expects average growth of 3.5% over the next year. They also forecast CPI gains averaging more than 4% in the second half of the year.
CNBC’s Michael Bloom and Saheli Roy Choudhury contributed to this report.