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Page added on May 20, 2018
The Oil Market Strikes Back
It is not an obvious connection, but the Fed and oil are inextricably intertwined. When the Fed is engaging in loose monetary policy, it tends to weaken the dollar and inflation tends to rise. A weaker dollar has a tendency to support commodity prices by making them cheaper in other currencies.
So how did the Fed reengage in the oil-price game? By subtly shifting from a 2 percent inflation target toward a more amorphous target that allows for some overshooting of that 2 percent, the Fed is saying is will move more slowly in tightening monetary policy. Lower and slower rate hikes (or “looser” policy) is a tailwind to the commodity complex. Not only does it tend to allow the dollar to fall (at least relative to where it would have been) and inflation to pick-up more, the lack of a restrictive monetary policy should allow the growth cycle to continue for a longer than otherwise possible.
A couple leaps of faith need to be taken to put the pieces together here. The most critical is that the Fed is serious of inflation symmetry. Another is that the natural rate (or neutral rate) of interest, which is where the Fed transitions from loose to tight monetary policy, is somewhere around 1.75 percent at the moment with a likelihood of moving up to 2.5 percent.
Symmetry is a crucial part of the argument that follows because it sets the framework the Fed will operate within for the next several years. If the Fed is going to maneuver with a tolerance for inflation overshooting, it will need to set policy accordingly. To set policy in a manner that allows inflation pressures to build (but reduces the likelihood of a significant 1970s style flare-up), it should maintain a near-neutral stance in the interim. As of the most recent update, the real natural rate of interest is barely positive.
The nominal natural rate (at the end of 2017) was about 1.6 percent using the Fed’s favorite inflation measure of core PCE. Following the Fed’s hike in March, the fed funds rate is sitting at about neutral with the range of 1.5 percent to 1.75 percent. With inflation pricking up a bit and the economy doing better, the neutral rate should move higher toward the cycle peak of a bit shy of 2.5 percent over the next year or so. At the end of 2018, neutral should be close to 2 percent to 2.25 percent.
This means the neutral rate will be playing catch up with the Fed, and implies the Fed has two hikes left in 2018. Assuming the neutral rate continues to move higher to post–crisis highs, the Fed has room for another hike in 2019 before bumping into the 2.5 percent neutral rate.
That is only three hikes away. But maybe that is the point the Fed is attempting to make by asserting symmetry into its mandate. By shifting toward a neutral stance in a couple or few hikes, it will only slowly raise rates going forward, far different from the current expectations of Fed members on the dot plot. It is very consistent with the market’s expectation for hikes to stop at 2.75 percent. Might the Fed be admitting the market was correct all along?
It is this very lower and slower cycle that reinserts the Fed into the oil-price game. This is not necessarily a bad thing. Higher oil prices are no longer synonymous with recession in the United States. First, the United States could be described as a pseudo-petrol state. According to EIA data, the United States was the world’s largest oil producer in 2017 with a 15 percent market share. So, while the U.S. economy is diversified far more than other countries on the list, the United States is a tremendous part of the global oil market.
Second, “mining”, where oil and other mineral production is counted in GDP data, accounted for roughly 25 percent of Texas’ growth in 2017. Why single out Texas? It is a $1.75 trillion economy, constituting approximately 9 percent of the United States, and growing at more than a 5 percent clip. That is a tremendous growth rate for an economy roughly the size of Italy.
Granted, there will be pockets of weakness due to lower oil prices. For example, the current increase in gas prices nearly or fully offsets the gains from the tax breaks to lower income brackets. However, given that oil is now largely a product of the United States, those oil revenues flow back into the U.S. economy as capital expenditures, jobs, and wages.
So, it is unclear that higher oil prices are generally a negative for the U.S. economy in terms of consumer spending. In many ways, this should be considered more stimulative of a “Made in America” manufacturing boom than other forms of consumption.
In previous cycles of higher oil prices, consumers were squeezed and inflation surged. While the U.S. oil production dominance largely dissipates the consumption effect, it does not dampen the effect of higher oil on inflation expectations and therefore higher yields. This will likely be the primary transmission mechanism for higher oil prices to the economy. Oddly, this helps the Fed by keeping the yield curve steeper than it otherwise would be. Not to mention, the Fed’s willingness to let inflation accelerate a bit reduces the likelihood of the Fed tightening simply due to higher oil prices.
Oil prices moving higher is not purely a positive for the U.S. economy, but it is certainly not the negative it was in the past. Indeed, it is a growth engine for the United States. Further, the Fed is not going to rain on the party by tightening monetary policy too aggressively. The Fed is back in the oil price game.
Samuel E. Rines is the chief economist at Avalon Advisors in Houston, Texas.
36 Comments on "The Oil Market Strikes Back"
Roger on Sun, 20th May 2018 9:30 pm
The fed is in the oil price game right up until the day peak oil occurs. Thereafter it is irrelevant.
Go Speed Racer on Sun, 20th May 2018 9:37 pm
This is the dumbest article
I ever attempted to read
in my entire life.
It has nothing to say, and if it
did have something to say, then
it didn’t say it.
It blathers on, in impossible to
understand ways, about how The Fed
is manipulating the oil prices,
by toying with the inflation rate.
It makes not one droplet of sense
and therefore shouldn’t be posted.
No articles are better than pointless
inexplicable insane articles.
The author has head head shoved up
his butt. He can’t say anything he
is attempting to say.
And even if he did say it,
it wouldn’t make any sense anyway.
I seriously doubt The Fed screws
with the inflation rate to phuck up
the oil prices.
They do it to phuck up the middle class
of the USA. They create high inflation
to keep the middle class poor.
The high inflation helps to pay off
severe government debt, caused by unlimited
stealing of trillions of dollars by the
filthy rich, conduited thru the Trump
Administration in the form of tax cuts.
The author of THIS article is full of crap
he doesn’t even know whats going on, and
his fundamental premise is horsecrap,
even if he could say it,
which he could not.
MASTERMIND on Sun, 20th May 2018 9:54 pm
2017 USA
Record number of mass shootings. Record number of category four hurricanes hit. Record number of retail store closings. Record number of drug overdoses. Record low number of babies born…
See! The sky is falling!
Go Speed Racer on Mon, 21st May 2018 3:20 am
Record number of losers who
won’t even mow a lawn.
So I mowed my lawn myself today.
Cause there’s nobody I could pay to do it,
they are all busy shooting up the school.
Record number of stupid fat Americans on meth. Record number of $hitheads with
their thumb up their arse.
Record for country in freefall, climbed so
high in the 70’s and fell so low since then.
Record number of scumbag politicians
humping each other in the DC Airport
men’s room.
Antius on Mon, 21st May 2018 8:40 am
One for Cloggie. I think you have probably examined this concept before.
I am considering making this the topic of my first blog post. My goal is to fulfil the dying wish of Arthur C Clarke – for humanity to kick its fossil fuel habit. I will settle for an 80% reduction in fossil fuel use as a reasonable 21st century goal.
An interesting idea investigated by the US National Renewable Energy laboratory: Solar augmented fossil fuel power plants.
https://www.nrel.gov/docs/fy11osti/50597.pdf
The idea is to use solar heat to pre-heat the feed water entering a fossil fuel power plant boiler. In this case, because solar can only pre-heat the water to relatively low temperatures and is only available during the day and only raises high temperatures during summer months, the total fossil fuel emissions avoided is disappointing – only 3.3%. But it is low hanging fruit, since no hot water storage is needed and the solar heat is converted to electric power at 40% efficiency.
The development of augmented fossil fuel power stations opens up interesting possibilities for low cost renewable energy storage. Excess wind and solar electricity can be stored as heat very cheaply in bulk solid materials like rock or concrete. At 700C, these store as much energy per unit mass as lithium ion batteries, yet they cost virtually nothing in comparison.
A hot rock thermal store would be a steel lined concrete tank, containing crushed basaltic rocks and probably using dry sand for insulation. Heating can be provided by heating elements slid into steel tubes running horizontally through the thermal store. Steam can be extracted by passing water through carbon steel boiler tubes running vertically through the store. The steam emerging from the store (heated to 300+C) then passes into a coal boiler or natural gas CCGT waste heat boiler where it is heated to temperatures of 600C+, before passing into a steam turbine. Some ultra-critical steam power plants now have efficiency approaching 50%. As the power plant is co-fired, it will always be possible to provide steam of a consistent quality to the turbine, so that the changing temperature of the thermal store is not problematic.
One can imagine such a power plant providing back-up power for a renewable energy system. It would absorb excess power from the intermittent renewable energy producers and produce dispatchable power as its output.
1. Let us assume that half of all intermittent power produced is absorbed within the thermal store, with the other half going direct to grid. We would absorb the renewable energy ‘peaks’ so that what goes onto the grid matches baseload as closely as possible.
2. Stored heat provides half of the total energy input to the steam turbine, with the remainder provided by a 50-50 mix of coal and biomass, with biomass input varying seasonally.
3. The powerplant is 50% efficient.
4. We scale the system to multi-GW size, to gain maximum economy of scale.
The whole system would provide baseload electricity using the following proportion of primary energy: 75% intermittent renewables, 12.5% biomass and 12.5% coal. We would lose approximately 25% of the intermittent renewables in storage. The huge heat capacity of the thermal store and the availability of coal, means that even in the event of a long-term lull in renewable energy input, power would still be available, although coal consumption would increase on these rare occasions. The economics of the concept would compare to those of a large coal burning plant, except that half of the fuel would intermittent electricity ‘peaks’. On this basis, the LCOE can be estimated by assuming that half of power is a mixture of wind and solar and the other half is coal based.
Chico on Mon, 21st May 2018 9:31 am
Samuel,
The IMF loans money to desperate countries that have nothing but oil to sell. The IMF likes to get paid back. Therefore, they allow the price of oil to rise so they can get THEIR money. They will not loose money!!!!
kanon on Mon, 21st May 2018 10:09 am
I thought that “symmetry” is the matching of FED interest rate policy to inflation and “neutral” is when they are the same. It is too much to expect a straight answer or even a relevant answer, but I think the question is whether the monetization of fossil fuel production is matched by economic activity or by inflation. Higher fossil fuel prices mean more money into production, refining, and distribution and possibly less money into consumption activities such as agriculture, driving, auto sales, construction, etc. The less money into consumption is compensated for with rising consumer prices — the annoying form of inflation. Since the fracking process is characterized by high consumption itself, the money circulation in the economy might serve to ameliorate losses in the consuming sectors. So fracking is a stimulative and low inflation activity. There you have it — another incredible benefit of fracking.
Cloggie on Tue, 22nd May 2018 12:37 pm
I am considering making this the topic of my first blog post.
Great!
A little warning though, blogging is great fun and very addictive, especially when the number of “hits” go into the hundreds of thousands. But it is an efficient way to stay informed on the topic you are blogging about.
Cloggie on Tue, 22nd May 2018 12:59 pm
I think you have probably examined this concept before.
I haven’t, sounds counter-intuitive, turning electricity in heat, but after I verified that the concept has some traction, among them in Germany, I will effeminately look into it later.
As a reminder to myself:
https://deepresource.wordpress.com/2018/05/22/power-to-heat/
MASTERMIND on Tue, 22nd May 2018 2:12 pm
Clogg
Blogging is great also when you block any comments so nobody can refute your lies..Just like all the religious videos on youtube..
Cloggie on Tue, 22nd May 2018 2:32 pm
“Blogging is great also when you block any comments so nobody can refute your lies..Just like all the religious videos on youtube..”
I don’t want dog shit on my carpet, likewise I don’t want comments from people like you on my blog.
MASTERMIND on Tue, 22nd May 2018 2:44 pm
clogg
The truth fears no comments..That is why you censor..mr king of free speech..lol
Why don’t you go burn some books next clogg..If you can do one you can do the other…
MASTERMIND on Tue, 22nd May 2018 2:49 pm
Millennials born in 1980s may never recover from the Great Recession
http://money.cnn.com/2018/05/22/news/economy/1980s-millennials-great-recession-study/index.html
Cloggie on Tue, 22nd May 2018 7:36 pm
How do you burn a pdf?
MASTERMIND on Tue, 22nd May 2018 7:46 pm
Clogg
Putin’s ‘unlimited range’ nuclear missile crashed after 22 miles, US intelligence sources claim
https://www.telegraph.co.uk/news/2018/05/22/putins-unlimited-range-nuclear-missile-crashed-22-miles-us-intelligence/
LOL Putin is a dead man walking..Just one false flag away..And if Trump wont engage he will be labeled a Putin puppet..so he will..
Cloggie on Tue, 22nd May 2018 7:55 pm
He just kicked your ass in Syria and now another debacle is about to materialize: “regime change in Iran”.lol
I’m betting on regime change in Washington instead.
https://youtu.be/Va6MAwexpnE
Makati1 on Tue, 22nd May 2018 8:09 pm
MM: “Us intelligence” is an oxymoron. You actually belied that blatant lie? WOW! talk about gullible! The Russians already proved that they can fire a missile from the Caspian Sea and accurately hit targets in Syria, 1,000miles away, or did you forget that fact? The US fires 100+ missiles and less than 1/3 actually hit their targets and they were fired from just off shore of Syria. Who is ahead?
FYI: https://www.theatlantic.com/international/archive/2015/10/russia-cruise-missiles-syria/409444/
“Russia and China have succeeded in this task, testing and entering into production various hypersonic missiles equipped with breakthrough technologies that will strongly benefit the entire scientific sector of these two countries, and against which the US currently has no counter.”
https://www.zerohedge.com/news/2018-05-21/how-russia-and-china-gained-strategic-advantage-hypersonic-technology
“The objective of the Russians and the Chinese is the realization of a highly defended (A2/AD) environment on their coasts and in their skies, which are buttressed by hypersonic weapons. In this way, Russia and China possess the means to disrupt the maritime logistical chain of the US Navy in the case of war. In addition, the A2/AD would be able to stop US power projection, thanks to HGV weapons able to sink aircraft carriers and target specific land-based ABM systems or logistic-chain hubs….It will take a while for the US to close the hypersonic technological and scientific gap with China and Russia.”
The Us will NEVER catch up.
Cloggie on Tue, 22nd May 2018 10:58 pm
Atlantic: “Russia and China have succeeded in this task, testing and entering into production various hypersonic missiles equipped with breakthrough technologies that will strongly benefit the entire scientific sector of these two countries, and against which the US currently has no counter.”
Conclusion: write off the complete US navy that slobbers up 40% of the US war preparation budget. Add to that the USAF and even incoming missiles are not safe anymore these days against other missiles.lol
Warfare has completely changed in the 21st centure. The balance has shifted from offense to defense, a very positive development. The US will find that out if they will be so stupid to bomb Iran.
Talking about “bomb, bomb, bomb, Iran”, McCain is almost dead, may God (or the devil) have his poor soul.
Now the Bulgarians are in deep regret that they ever followed orders from McCain not to build South Stream and now have to observe that Germany will build North Stream after all. Reaction Moscow: too late.
https://www.rt.com/business/427403-russia-pipeline-bulgaria-senator/
https://sputniknews.com/europe/201805211064645953-bulgaria-south-stream-revived/
MASTERMIND on Tue, 22nd May 2018 11:07 pm
Clogg
I hope Mcain dies quick..He might want to take the whole world down with him..And posting RT and Sputnik are laughable..You are swallowing Russian propaganda like mothers milk..
Cloggie on Tue, 22nd May 2018 11:25 pm
https://sputniknews.com/business/201805201064622831-austrian-energy-giant-defends-dependence/
“Not a Problem’: Austrian Energy Giant Defends ‘Dependence on Russia’”
“You are swallowing Russian propaganda like mothers milk..”
Uh no, together with Russia (640m, nukes) we in Europe can finally defeat you and restore the natural hierarchy between the European Mother Civilization and its North-American colony of 300 years. The prarie dwellers were unable to defend themselves against the corrosive influence of your tribe, where Europeans in contrast put you on the train to the East, a subtle difference. As a consequence whitey will soon be a minority and at the electoral mercy of the darkies, good luck with that. Your tribe has already announced that whitey is evil and needs to be made powerless:
https://documents1940.wordpress.com/2017/09/27/paul-krugman-white-americans-are-losing-their-country/
Trump was the last burping of European America, after him it will be game over for whitey. Then the only way out will be secession… with a little help from their older brothers in Europe.
See why I am so upbeat and you entertain the thought of suicide?
MASTERMIND on Tue, 22nd May 2018 11:28 pm
Clogg
Too much belly for a race war..
https://i.redd.it/x9ff3acacfz01.jpg
MASTERMIND on Tue, 22nd May 2018 11:31 pm
Garry Kasparov: I told you Putin would attack U.S. election — and he will again
https://www.yahoo.com/news/gary-kasparov-told-putin-attack-u-s-election-will-195305087.html
They are going to blame Russia all over again come next election..Just watch..Then it will be considered an act of war..and putin will be hit with a nuclear first strike..
MASTERMIND on Tue, 22nd May 2018 11:36 pm
Putin’s ‘unlimited range’ nuclear missile crashed after 22 miles, US intelligence sources claim
https://www.telegraph.co.uk/news/2018/05/22/putins-unlimited-range-nuclear-missile-crashed-22-miles-us-intelligence
HAHAHHAHA!! Russia is a joke with a GDP the size of Italy..
Cloggie on Tue, 22nd May 2018 11:43 pm
HAHAHHAHA!! Russia is a joke with a GDP the size of Italy..
Their army is not a joke.
GDP
EU 19T
USA 18T
Russia 4T
Expect a drop of US GDP of 35-40% after the fall of the dollar.
See? Russia will not be the new overlord of Europe, but will be satisfied operating at the same level as Germany and France, hence “Paris-Berlin-Moscow”.
https://documents1940.wordpress.com/2018/05/10/boreas-rising-paris-berlin-moscow/
But together with Russia we can and will be the senior partner of the white parts of a balkanized America… “after the break”.
Questions?
MASTERMIND on Tue, 22nd May 2018 11:48 pm
Clogg
Only in your deluded brain..Everything you believe in based on faith..No evidence..and when the oil starts to run out soon..it will all be blown to bits..LOL
Cloggie on Tue, 22nd May 2018 11:52 pm
it will all be blown to bits..LOL
You have a nasty sense of humor.
Only in your deluded brain..Everything you believe in based on faith..No evidence
It is not possible to prove anything about the future. That’s where intuition comes in. You have it or you don’t.
Makati1 on Wed, 23rd May 2018 5:17 am
Cloggie, MM cannot accept that the world will go on after the Us is trashed. The wrld will actually thrive as the excess 20% of resources the Us wastes annually will be redistributed among the rest of the world.
If the Us was blockaded/isolated and not allowed to export or import, it would die in the first year. Few Americans have a clue how much their lifestyle, and life, depends on imports.
Bring on the trade war. Watch the carnage in America. I’m waiting.
Davy on Wed, 23rd May 2018 5:39 am
“Expect a drop of US GDP of 35-40% after the fall of the dollar.”
Expect the fall of global GDP of over 40% after the fall of the dollar.
Antius on Wed, 23rd May 2018 5:42 am
“If the Us was blockaded/isolated and not allowed to export or import, it would die in the first year. Few Americans have a clue how much their lifestyle, and life, depends on imports.”
Something the US is well aware of and exactly the reason that their navy is as large as the rest of the world’s combined. There are no realistic challengers to US naval superiority in the foreseeable future.
Davy on Wed, 23rd May 2018 5:48 am
“Conclusion: write off the complete US navy that slobbers up 40% of the US war preparation budget. Add to that the USAF and even incoming missiles are not safe anymore these days against other missiles.lol”
Nonsense, these missiles are no different than nukes or stealth delivered warheads. They can’t be used without mutually assured destruction caused by escalation. If carriers are such a poor investment why is China building them? Nope, conclusion is wrong, the US has a very robust diversified military that effectively delivers military to all reaches of the globe but the real conclusion is rather different. The conclusion is we need to reduce all militaries because we have a multipolar world now at the limits of military. Large militaries and multiple smaller militaries that are equivalent to large militaries are too big and now in diminishing returns. There is no room to maneuver or effectively achieve military results with so many militaries and so large a military footprint by civilization.
Makati1 on Wed, 23rd May 2018 6:17 am
“There are no realistic challengers to US naval superiority in the foreseeable future.”
Bullshit! Both the Russians and the Chinese will take out the Us carrier groups in the first hour of any major war. The Us Navy knows that that is a fact. Only Americans in denial or brainwashed would believe different.
fmr-paultard on Wed, 23rd May 2018 6:30 am
i have BFs and i don’t know why it’s so hard for certain individual to say they have BF in the phils. i’m not gay or anything. i only want to score with women if i ever have a chance.
MASTERMIND on Wed, 23rd May 2018 6:30 am
Madkat
You think China and Russia would take on the US and our allies? LOL Keep dreaming you demented old hag..You are as dumb as they come.
fmr-paultard on Wed, 23rd May 2018 6:34 am
SENTAPs destroy values. i remember when the intardweb was new it was full of ideas and leftism and technology. i learned a lot. i learned 24×7 thanks to the intardweb. now we have nazi propaganda and PBBM “confederation” 24×7 plus vanuatu
Makati1 on Wed, 23rd May 2018 6:45 am
MM, the US has no ‘allies’. In case you have not noticed, most of the old ‘allies’ are moving away from the insane Us. Even Germany. They see that the Us is destroying Europe in the name of world domination. Trump is driving the last nails in America’s coffin.
BTW: I don’t even consider opinions of immature, uneducated, unintelligent persons such as yourself, as valid. Being trapped in the Us gulag must be frustrating and scary. I wouldn’t know.
MASTERMIND on Wed, 23rd May 2018 9:57 am
Madkat
At least I have friends and family and a beautiful girlfriend around me..You have nothing..You are just a old crabby angry incel who will die alone..