Global Economic Crisis

Sheldon Filger-blogger for GlobalEconomicCrisis.com

As governments  globally boasted of their speedy transition to a “Green” economy, in the process doing everything possible to discourage future oil exploration and extraction, they suddenly were confronted by a painful realization. The economically developed nations in the world are still highly dependent on fossil fuels, and will likely be for several decades to come. That, and the Covid-induced supply chain disruptions coupled with  geopolitical shocks, in particular the Russian invasion of Ukraine, have created a perfect storm. Every element leading to elevated oil prices is in play, an economic torrent driving up consumer prices for gas to unprecedented levels.

Just over a year ago, in May 2021, U.S. crude oil was priced at under seventy dollars per barrel. Only one year later, that price exceed in $113.00, and has continued to accelerate into June.  This has had major inflationary impacts throughout the global economy. Virtually every form of major  economic activity, from manufacturing to land and air travel and maritime shipping of exports and imports, is reliant on oil. Renewable energy is but a small fraction of the energy consumption required for sustaining global economic activity. To give but one example, food prices, already experiencing high price increases due to supply disruptions, greatly exacerbated  by the war in Ukraine, will be further hammed by  energy price inflation. Agriculture and food processing , along with its transpiration to market, is a highly industrialized process  involving staggering levels of carbon energy consumption.

The oil price spikes will create a tsunami of inflationary pressures. The immediate impact most visible to consumers, however, will be at the gas pump. No other economy in the world is as depended on cheap gasoline  as is the United States. One year ago the average price of a gallon of gas in the U.S. stood at just over $3.00.A year later that average is just under $5.00.In California the average cost of a gallon of gas exceeds six dollars.

In response to the exploding cost of oil, the Biden administration has attempted band aid solution, such as releasing some of its strategic petroleum reserve  into the market. This has only brought about a marginal and brief amelioration in the cost of oil. In effect, the U.S. and the other major  energy consumers have no policy prescriptions. There remains only one force that will ultimately retard price inflation in the carbon  fuel sector: demand destruction resulting from a severe global recession.

The demand destruction created by policy responses to the Covid-19 pandemic has led to the collapse of oil prices, and the decimation of the energy industry. No better example illustrates this than the April 20 data for next month’s delivery, in which prices went to zero per barrel and even negative, with WTI (West Texas Intermediate) going to minus $30 per barrel. This surreal price discovery was brought about by a combination of demand destruction in the economy, combined with a lack of storage capacity for oil, leading to producers paying consumers to take their oil.

The implosion in oil prices has occurred in spite of the truce in the oil price war recklessly unleashed by Russia and Saudi Arabia right at the beginning of major global recession. The cut in production by three million barrels a day by OPEC and Russia is statistically insignificant, given that the coronavirus has shuttered much of the world’s economy, leading to a fall in consumption of more than 20 million barrels per day.

The hope that  oil prices may recover latter this years is based on a flimsy premise that there will be an economic recovery by year’s end. This looks increasingly unlikely, and the probability of a second wave of Covid-19 will continue to depress industrial and transportation activity that typically consume most oil production. Short of a war in the Middle East that would shut down the Strait of Hormuz, oil prices are likely to remain depressed for the foreseeable future, crippling much of the energy industry and confronting a multitude of oil producers, especially shale oil companies in the United States, with increasingly inevitable bankruptcy.

What is occurring in the  energy sector is a reflection and indication that the Global Economic Crisis unleashed by Covid-19 will not only exceed the financial crisis of 2007-09 in its severity; it is increasingly likely to rival the Great Depression of the 1930s in its ruinous impact.