Consciousness of Sheep
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While most of the world’s media were focused on the impact of more than a metre of rain pouring down on Houston, Texas, the financial journalists had other matters on their minds. In particular, as Harvey approached, the consensus seemed to be that the one silver lining was the inevitable rise in oil prices that, they said, was bound to follow.
In fact, the opposite looks likely. As energy industry historian Ellen R. Wald at Forbes noted on Tuesday:
“…unlike after other Gulf hurricanes, there is no expectation of a shortage of crude oil because there is so much excessive oil already in storage. The problem, in this case, is ensuring that active refineries can access crude oil.”
With the remnants of Harvey now taking out oil infrastructure along the Louisiana Coast, the USA – the world’s largest consumer of petroleum – has lost between a fifth and a quarter of its refining capacity. So despite the loss of some fracking output, oil production is not a big issue – most of the offshore Gulf rigs that halted production while the storm passed over them are now back in production. The real production problem is what to do with all of the oil that the Texas and Louisiana refineries would ordinarily process.
The even larger problem, however, is what happens to an economy that – more than any other on the planet – is uniquely dependent upon road transportation, when more than 100 million gallons of fuel per day is suddenly unavailable. This is what happened on Thursday (31.8.2017) when the main Colonial Pipeline – which supplies fuel to towns and cities along America’s east coast – was shut down. As David Sheppard in the Financial Times reports:
“Colonial, which is the biggest single fuel transporter in the US, shipping more than 2.5m barrels a day on its line, or roughly one in every eight barrels of fuel consumed in the country, said in a statement late on Wednesday that its line carrying diesel and jet fuel would shut on Wednesday evening, followed by its gasoline pipe on Thursday.”
In September 2000, eight days of fuel protests which prevented just 10 percent of deliveries in the UK brought the economy within days of a complete collapse as critical infrastructure systems began to fail… and the UK is far more fuel efficient – and the distances involved far less – than the USA. The UK situation was compounded by a wave of panic buying; not just of fuel, but of essential food stocks, as people attempted to batten down the hatches in the face of a perceived crisis.
It is too early to know whether similar panic buying will occur in the USA. However, with prices of petrol (gasoline) already rising, the temptation for individual consumers to fill up before prices rise even further may generate the kind of queues that helped bring the UK to a standstill 17 years ago. Nor is it just the US that will be affected by rising fuel prices. Energy companies will attempt to ship refined fuels from Europe and Asia to fill at least a portion of the gap in the USA; leading to increased prices here too.
This raises the broader question of how resilient the wider US economy is to a sudden increase in fuel costs that will inevitably translate into higher prices across the economy. In 2014, when the global price of oil collapsed, the Bank of England’s Ben Broadbent referred to falling fuel prices as being equivalent to a tax cut. In this, he was correct; although his claim that it would translate into economic growth was fundamentally flawed. Given the number of zombie firms, households and individuals servicing but unable to discharge their debts, the fall in fuel prices was always more likely to result in the destruction of currency – as people paid off existing debt – than its creation as consumers embarked on the predicted spending spree. The tax analogy does, however, work the other way. A sudden spike in fuel prices will be experienced by US firms and households as if it were an unexpected tax increase – a non-discretionary item that will have to be funded by cutting back on spending elsewhere. Given that the US retail sector is already in crisis, that ‘tax’ increase is particularly unwelcome, and may even force the Federal Reserve to reverse its recent interest rate rises.
It is worth noting that 10 out of the last 11 US recessions – including the one that triggered the crash of 2008 – were preceded by a spike in fuel prices. And if there is one lesson that comes from 2008, it is that what starts as a US problem very quickly develops into a global crash. Thus, both in terms of keeping the real economy running, and avoiding financial collapse, everything rests upon the speed at which the Gulf Coast refineries and pipelines can be brought back on line. Leave it too long, and America may sneeze… and, as the old saying goes, the rest of us may end up catching a particularly nasty cold.
