Column: Surging oil prices show business cycle slowdown is inevitable: Kemp

The Imperial Strathcona Petrochemical Refinery is located near Edmonton, Alberta, Canada, on October 7, 2021. REUTERS / Todd Korol

LONDON, June 14 (Reuters) – Politicians, economists and journalists often talk about the business cycle using the language of good and evil in a fairy tale.

Booms are attributed to wise and enlightened policies, while recessions are attributed to policy mistakes or the need to clean up the previous excess.

But economics is not a matter of morality. Expansions are not a reward for virtuous and wise actions, and recessions are not a punishment for misbehavior and mistakes.

The disruptive cycles of production, employment, prices, and wages can be traced so far in history that data can be used to reconstruct economic performance.

The “trade cycle” of ups and downs dates back to at least the early 19th century in Britain and North America.

Only the scarcity of data on production and employment limits it to modern and medieval Europe.

Cyclical volatility seems to reflect fundamental forces rather than guilty behavior by central banks, finance ministries, markets, businesses and households.

There is no sign that policymakers can stabilize the cycle if they have enough information and knowledge about how the economy works.

Long expansions in the 1990s, early 2000s, and 2010s led to premature pronouncements about the end of the business cycle, only to be followed by recession in 2001, 2008, and 2020.

RESERVE CAPACITY

In the case of the oil market, surplus production capacity, stocks and prices of both crude oil and refined products are closely correlated with the economic cycle.

Prolonged economic cycle expansions lead to the gradual erosion of surplus crude oil production and refinery capacity, as well as stocks, and eventually put strong upward pressure on crude oil prices and refining margins.

Recessions restore a greater capacity and stock margin in both crude and refining and put downward pressure on prices and margins.

Currently, the global economy is rapidly depleting to produce more crude oil and convert it into refined fuels, especially diesel (https://tmsnrt.rs/3xrSXWB).

The rapid rise in oil consumption after the pandemic has been exacerbated by the invasion of Ukraine by Russia and the European and US sanctions imposed in response.

The result is an accelerated rise in crude oil prices and refining margins, reflecting the end of previous booms in 2008 and 2001.

In the United States, the Biden administration has been reduced to helplessly begging for an increase in oil production and trying to increase its refining capacity in the short term.

But based on past experience, the only solution is a sharp slowdown in the business cycle to restore higher levels of surplus capacity and reverse some of the rising prices and margins.

The problem of consumption exceeding production capacity is not limited to oil.

The same tensions are evident in many other commodity markets (including gas, electricity and coal) as well as food, manufactured goods and services, creating a widespread inflation problem.

Central banks in the United States and around the world have begun to sharply raise interest rates to reduce inflation by forcing slower growth in consumption and investment.

At this point, a slowdown in the economic cycle has become inevitable because the only alternative is to worsen shortages and accelerate inflation.

The only question is whether it will be smooth, in this case it will be called “soft patch” and it will be said that the current cycle continues, or a more serious one, in this case it will be called “recession”. “and the cycle will start again.

One way or another, the pace of economic growth must be slowed to regain the balance of the oil market.

Related columns:

– Global diesel shortage heralds imminent economic downturn (Reuters, May 19) read more

– World diesel shortage boosts oil prices (Reuters, March 24) read more

– Diesel is the Canary Islands inflation of the US economy (Reuters, February 9) read more

John Kemp is a Reuters market analyst. The opinions expressed are their own

Editing by Edmund Blair

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