I missed an article in the FT on Friday, and although it is now a day or two old, I think it is worth noting. Its suggestion was:
The oil market is four weeks away from a “tipping point” that will drive prices significantly higher, traders have warned, as the blockade in the Strait of Hormuz reduces global stockpiles below critical levels.
The comment came in the light of growing awareness that the Strait of Hormuz could remain closed for many more months, and this will have a major oil market impact.
As the FT added:
Traders and analysts warned that global stocks of crude, gasoline, diesel and jet fuel will hit critically low levels by the end of May, at which point prices will escalate rapidly.
They noted this:
Frederic Lasserre, head of research at Gunvor, one of the world's largest oil traders ... said “The tipping point is clearly June. This is the point at which something has to give.”
They then noted:
Amrita Sen, founder of consultancy Energy Aspects, said that if the war continues until the end of June all stocks would be exhausted.
At that point, he added that oil prices would become completely unpredictable, but $200 a barrel was possible. It has not been above $140 before now. It hit $126 last week but then fell back.
I have kept talking about a coming recession or depression. This is why. Oil at this price will cause that.
There will also be substantial inflation if this happens. Most empirical estimates from the likes of the IMF, OECD and central banks) suggest that a $ 10-per-barrel increase in oil prices might raise headline inflation by roughly 0.2 to 0.4 percentage points over the following 6 to 12 months in an economy like that of the UK. Call it 0.3% on average, and reckon the price might go from $60 to $200 a barrel in six months, and the result is an increase in the inflation rate of more than 3 per cent, although the extrapolation might not hold (and could be worse) over such large price changes.
Will the Bank of England increase interest rates to maybe 7 per cent as a result? Don't rule it out.
And what would that mean if mortgage rates went up by the same amount? The key point here is that mortgage costs are non-linear with respect to interest rates. A 3% rise does not mean a 3% increase in payments. It is much larger. On a fairly typical £250,000 mortgage of 25 years at a current rate of 5.75%, a new rate of 8.75% would change the cost from maybe £1,580 per month to around £1,970 per month, which is an increase of about £390 per month, or an increase of roughly a 25% rise in monthly payments.
Now I know many people are on fixed-interest mortgages, but the impact of such a change at the same time as rising inflation, absolute shortages of oil and food, recession, declining employment as businesses fail, and more, could be cataclysmic.
I offer warnings for a reason. It is to say that action is needed by the government now, including a clear direction to the Bank of England that it will not be required to respond to this inflation, and must not do so.
We are heading for economic disaster as a result of Trump and Netanyahu. Nothing a UK institution does should make this worse than it will be. The fact that the Bank of England has the capacity to do so worries me.
We are in the lull before the storm right now. It will break soon.
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I am reminded of the opening scene from the French film La Haine. A man is falling from a skyscraper. He resssures himself by saying so far, so good. So far, so good.
Correct
Sundays shopping might be a couple of Jerrycans full of Petrol.
And, if that were not bad enough, you can see a situation arising where the Orange Parrot decides that he will have to go all the way and depose the Iranian state with a full on traditional invasion war in order to steal their oil. That I believe anyway is what I think will be coming next.
I am thoroughly disgusted with the lack of mettle and ideas from other countries who seem content to let this happen (if it does).
And I want to be so wrong.
I don’t think he would be made enough to do this
He would fail
Trump may not be mad enough, but his ‘spiritual advisors’ on the other hand……
Hey look………..I would be happy to be so wrong on this.
“many people are on fixed-term mortgages” – perhaps you mean fixed-interest mortgages?
I do. I will change it.
I have been very surprised that oil prices have remained as low as they are given the circumstances. Think back to the Russian invasion of Ukraine in 2022 and the massive price spike in a world with much more stored oil and far less disruption. It has puzzled me, especially with physical oil (actual purchases of oil rather than the prices for “paper” oil futures) regularly topping $160/b in Asian markets. For some reason, the markets appear to be taking the most optimistic view of how this conflict will proceed at each and every moment. And as each day passes, the underlying situation gets worse.
At some point you think futures prices will reflect real risks, but maybe in a world where each and every market is decoupled from reality we can just extend the fever dream of lower prices indefinitely. Well, I suspect it can’t last, and unless a deal is made (which I still think is the more likely outcome) the markets may well have made things worse.
Earlier more substantial price signals may have put more pressure on actors to seek a solution, and consumers to take more robust actions to deal with shortages sooner. Ironically, market optimism has made the softer landing less likely. A lot of damage has already been done to inventories, capacity and bulk transport of energy (and other commodities). While a solution tomorrow might stave off $200 oil, it won’t bring prices down very much anytime soon. Market optimism may be keeping prices lower than I would have thought, but it is actually more damaging to us than a sharper price spike earlier I would argue. Once again, we can doubt the wisdom of the all knowing market…
You have already mentioned rationing. Global level of rationing would decrease demand and stop wasting.
My personal opinion during any type of supply issue nations should come together and start educating people about the hardahip they facing if not following strict rules. Those nations who would like to capitalize on other nations sensiblebreaction could be punished through economic ways, so it would not worth for them to exploit the situation.
Personally I see none of these happening. Markets have no incentive to do anything since they justraking in money on others suffering.
I am working with petrol based materials I know I can’t stop work vut actively seeking to cut waste. Thats all a person can do.
I am not hopeful at all about the future in this matter. I wish you wisdom and strenght if/when everything start to crumble. Because noone will help the individual stuck in the mud…
It was said of one campaigner that he had looked too hard at the future and been scared witless by what he saw to the extent that it had clouded his judgement.
I wonder if Governments have either decided NOT to look at whats going to happen OR having looked are to scared to do anything
Paul Krugman, like you, has been warning, for some time, that the price of oil has to rise substantially more if the war continues (as looks likely). https://paulkrugman.substack.com/p/the-harm-from-hormuz
Krugman estimates oil prices assuming various scenarios with low medium and high elasticity and disruption for the price of oil. His worst case scenario, low elasticity and high disruption, which seems entirely plausible, yields an estimate up to $372 per barrel of Brent crude.
Historically the peak price of Brent crude, adjusted for inflation, was about $180 per barrel in 2008. It seems unlikely that this peak will not be surpassed in this much worse economic shock.
Even if we are lucky, and the price rises ONLY to $260 per barrel, that corresponds to an increase in inflation of about 6%. So, an inflation rate of about 10%.
UK inflation peaked at over 11% in October 2022. It seems unlikely that the UK will escape lower inflation from this economic shock.
Sadly, I think you are very optimistic in suggesting an increase of inflation of only 3%. I so hope I am wrong. Whatever the actual increase in inflation the UK economy, and more importantly it’s people, are in for a very rough ride. 🙁
Thank you
I should, perhaps, add that Trump deserves a medal for services to speeding up the transition to green energy.
Whatever is the ultimate resolution of this conflict, the price of oil will be much higher, and will remain that way for some time. It is already evident that there is significant increased interest in solar energy and electric cars.
Ultimately the world economy will adjust and inflation will pass, albeit with a trail of destruction and suffering in its wake. And Trump will have significantly damaged the prospects of the oil companies, and their wealthy owners, that he seeks to support.