If oil flows are normalizing, why are oil prices rising?
First, rising they are:
However, flows are not quite “normalizing,” at least in the sense that, as best we can tell, transit through the Strait of Hormuz is still contested, expensive, and maybe down 25% compared to prewar. But pipeline bypasses are adding capacity such that Middle-East global energy supplies appear to be close to prewar levels.
The problems are: freight rates are way up and, because oil markets are forward looking, the fact that tensions are escalating means higher risk premia are being added to crude prices. There are also demand pressures from refineries motivated to build up depleted inventories before the next round of violence, which is expected to follow the US midterms.
In other words, there’s no question that the war is still pressuring prices through numerous channels. One of these is sharply higher freight rates. Here’s Goldman Sach’s energy analyst Daan Struyven:
The global average crude freight rate has surged by $20 per barrel over the last year, with about three-quarters of that increase related to the costs from reorganizing the supply chain to get crude out of the Middle East, both because of a risk premium to compensate the shippers for the higher risk of strikes, but also because we’re tying up a lot of tankers in an inefficient way via the ship-to-ship transfers…
Such transfers are one way shippers move oil through the most dangerous part of the Strait. Shuttle tankers from inside the Gulf carry crude through the chokepoint to tankers waiting on the other side in the Gulf of Oman, a time-consuming and costly relay process.
All of this means pain at the pump will persist. Struyven points out that while crude is getting out of the Gulf at prewar levels, the movement of refined products is still constrained, due to both war-induced damage to refineries and the fact that “it’s harder to organize these ship-to-ship transfers for refined products than for crude because the products are more inflammable.” Diesel exports from the region are just 40% of the prewar average.
And, of course, these markets for refined products are tightly interconnected. Given highly elevated margins for diesel, jet fuel, and home-heating oil, there’s a strong incentive to refine more of these products and less lower-margin gas.
Punchline: You never know with these markets, but I’d bet retail gas prices are going up before they’ll be coming down.
New Political Lows
I will not sully this hallowed ground by getting into the debauched political ads that are commanding so much attention, especially that Ramaswamy one. But I happened to be in the car this AM and heard Obama, with his superb command of common-sense communication, arguing that such offensive ads are deeply socially corrosive, only to hear some political pundit come on countering that the question isn’t their social impact. It’s will they work in bringing out the base.
I’m with Obama, as you’d expect, and I’ll never see why “by any and all means necessary” is an acceptable criteria for whatever slop you choose to campaign on. But that’s me and others will feel otherwise.
What I’m more certain about is that this is a Trumpian comms strategy that is as old as the old fart himself and just as tiresome. Get the people fighting about culture and you’ll always be ahead. He and his followers “troll the libs” all day, and instead of a news segment about how oil and gas prices are rising due to the war, we get stories about Trump vs. Obama on the Ramaswamy ad.
I’ve never figured out how to stop this, especially for a media that lives on click bait, and culture wars get more clicks that explanations of the impact of ship-to-ship transfers on prices. To be clear, the fact that this admin has greatly worsened the affordability crunch has thankfully broken through and is the dominant reason why Rs are expected to lose big in the shortly forthcoming midterms (though readers know my reservations re the polling).
But it’s no surprise that Trump and co. are doing everything they can to distract voters from looking at their receipts and to instead get them fighting about just how low can we can go these days.
The Furmanator Launches Econvitals
The economist Jason Furman has used his prodigious AI skills to launch an amazing set of economic-analysis web products. Subscribe here and here. Do it now. It’s free and while you’ll need to control the inflow, for anyone interested in the sorts of data and broader analytic issues I cover here, it’s extremely useful. I rarely write up a data report without checking the Econvitals version—which arrives minutes after the release—to make sure I’m not missing something important.
Once you start receiving these reports and diving into the info and simulations (bond rate decomps, fiscal scenarios, etc.), you will likely be struck, as many have post-release of these products, by questions about what this means for economists and the market shops that employ a lot of people at high wages to do such analysis. Jason, like me, is a former CEA chair, and he caused a bit of a stir by saying “If I were running the CEA today and had a choice between 20 staff members…versus the AI systems that we have today, I would somewhat regretfully and sadly choose the AI systems.”
I don’t know about that. CEA work, at least in my experience, is highly bespoke as you’re explaining the data flow (and much else) to very busy people who don’t want only market-shop analysis. Yes, they want and need that—what will the markets make of this CPI, jobs, GDP, etc. report—but more so they want to know how this report fits into our narrative, our agenda, the president’s trip today to Iowa.
And—again, this is my bespoke experience in this highly bespoke setting—Klain, e.g., requires subtly different data notes that Zients (these were Biden chiefs of staff—as much the target for these memos as the POTUS himself). In other words, the human skill of reading-the-room is paramount. I’m far from an AI expert, but my sense is it sucks at that and probably always will, a conclusion that derives in no small part from listening to its creators!
