This is an opinion column. The thoughts expressed are those of the author.

Prepare for the Energy Crisis!
Sam Pearson 10/13/2021 11:01 AM

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This has been a tough 8 months for President Biden but it is getting ready to be a much worse year for America’s middle Class. Energy prices are rising like it is 1976.

Crude oil has risen 64% this year to a seven-year high. Natural-gas prices have roughly doubled over the past six months to a seven-year high. Heating oil has risen 68% this year. Prices at the pump are up nearly 51% over the past 12 months to a national average just over $3 a gallon. Coal prices are higher but stable due to decreasing demand.

These higher energy prices are expected increase inflation in coming months, thereby reduce consumer spending on other products and services, and ultimately slow the U.S. recovery.

Most of the increase in consumer prices are being driven by the combination of rising demand and restricted consumer supplies. WHO as well as the CDC predict that the pandemic is fading worldwide. This is predicted to create demands that have been limited. As consumers step up spending, factories and service providers are ramping up production, which requires energy. Oil supplies are tight because oil-exporting countries including the United States have decided to increase production in measured steps vs full production in order to drive prices.

Natural-gas supplies are running low after a freeze in Texas earlier this year drove up demand and Hurricane Ida forced nearly all of the Gulf of Mexico’s gas output offline, along with higher demand from Europe where inventories have dropped due to hot weather, lackluster wind-power generation and lower imports from Russia. Coal prices have been pushed up by rising demand in India and China while supply held back by carbon emission-reduction plans. 

The net effect acts as a tax on the middle class and significantly impacts the quality of life for the poorest American citizens.

I believe that we will see growth decelerate as prices continue to increase. I am one of the more optimistic analysis it seems.

Andreas Steno Larsen, an analyst at Helsinki-based Nordea Bank ABP, is more pessimistic. He said this year’s rise in energy prices has caused him to cut his estimate for U.S. growth next year to 1.5% from 3.5%. While he believes oil and gas prices will remain flat in coming months, he also sees a worst-case scenario in which they rise by another 40% some time next year, enough to push the U.S. and global economy into a brief recession in mid-2022.

As I said, I am more optimistic than most as many analysts believe prices will increase rapidly over the coming months. Moody’s Analytics projects oil will rise to between $80 and $90 a barrel by early next year from the current $79. Natural-gas prices to $6.50 to $7 per million British thermal units, from the current $5.56. JPMorgan Chase & Co. gives a worst-case scenario of oil rising for the next three years and reaching $190 a barrel in 2025. Electricity prices rose 5.7% in September from a year earlier, the largest gain since early 2014, according to the Labor Department.

As we have seen over the last 20 years, energy prices are volatile even in normal times, and particularly unpredictable now because of the cloudy economic outlook and how governments and investors will respond to the shortage of supplies. 

Consumer’s energy expenditures vary based on income. Energy represents a sizable chunk of consumer budgets especially as one approaches the 18-32% of American households. In August, about 7% of consumer spending went toward energy, according to the Labor Department, however in the bottom 32% energy cost approach 15% of total expenditures. Historically, high energy prices have often preceded recessions. Consumers typically find it difficult to reduce energy consumption on short notice, as opposed to discretionary purchases, so higher prices act as a tax to the middle- and lower-income households. This dramatically impacts available resources that one would normally spend on other goods and services.

On the positive side most American households have a cushion of savings from federal stimulus checks and unemployment insurance. “With American households sitting on greater than $2 trillion in excess savings compared to pre-pandemic levels, the U.S. is in a much better position to absorb whatever energy-induced shock that lies ahead compared to our European and Asian trade partners,” said Joe Brusuelas, chief economist at consultant RSM US LLP.

However, higher energy prices could aggravate inflation and prompt the Federal Reserve to withdraw its easy monetary policy sooner, damping economic growth.

The pandemic caused global demand for energy to collapse and while demand has recovered, energy companies are still cautious about drilling because of uncertainty about global demand and investor pressure to keep profit margins high, in part by limiting supply.

The next 8 months of the Biden Presidency will be an interesting as both Congress and American consumers will have to make critical decisions regarding how they allocate their resources during a period of increasing cost. 

#Energy #PeakOil #Bidenomics # Biden 

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Sam Pearson
Sam Pearson is a retired Army Colonel with a variety of experience in both government and private sectors. As arguably one of the World's foremost military logisticians, he has been responsible for the on time delivery of supplies and services worth billions of dollars. After service in Southwest Asia, he was hand picked to support logistics operations in support of earthquake relief operations in Haiti. Pearson now serves as a consultant and volunteer mentor for students seeking their doctorates in advance statistical analysis.

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