Publications: Notes at the Margin

2023: Nothing Is Certain (December 19, 2022)


The 2022 oil market is ending on an upbeat note—sort of. Prices rose last week on news of the shutdown of the spill-prone TransCanada Keystone pipeline and projections of increased demand in 2023 issued by the International Energy Agency and other forecasters. Prices may also have been boosted by predictions of rising commodity prices offered by Goldman Sachs’ Jeff Currie in his end-of-year appeal for investors to push more money into commodities.


However, the increases were quickly reversed when the world’s major central banks boosted interest rates by half a percentage point. Statements by Federal Reserve chair Jerome Powell warned of more increases to come in 2023 as the Fed remained focused on energy.


For oil, this was a warning. At the end of the week, buyers in the physical market remained cautious, unmoved by the Keystone disruption and the cap on Russian oil exports. Physical markets did not tighten. Further, the United States’ decision to loan Valero and Exxon two million barrels of heavy oil from the Strategic Petroleum Reserve to replace the lost Canadian crude ended any threat of US Gulf refining problems.


Markets, then, are coming to their year-end pause boosted only by the prospect of a cold wave sweeping the eastern United States for a week or two. The weather threat sent natural gas and heating oil prices sharply higher but without causing the backwardation observed during past frigid periods such as the February 2021 freeze that crippled Texas.


Looking forward, we see an oil market that is adequately or perhaps even well-supplied for the first months of 2023 absent a major disruption. At the same time, we see a global economy that has been brilliantly supported by government interventions during the energy crisis of 2022, interventions that required borrowing more than $1 trillion by European Union nations alone. These actions prevented economic collapse. However, the need to reverse them in 2023 will slow economic growth unless global inflation gets reversed quickly.


The consequence of the continuing inflationary pressure next year will be rising interest rates, an economic slowdown, and declining world oil demand. These developments could be magnified if China’s sudden covid policy change causes a prolonged downturn there.


To explicate the great uncertainty for the 2023 outlook, we first look back to a little over a year ago to when the looming energy crisis’ magnitude appeared. At that time, as worries about exorbitant prices emerged, we predicted a recession in 2022, especially in Europe. It did not occur because EU governments dramatically boosted spending to support their economies. Some of that spending was covered by windfall profit taxes on energy companies. Thus, while we correctly anticipated the impact of higher energy prices on GDP, our economic forecast was too negative.


It is unlikely that governments will repeat their economic subsidizations in 2023, especially given high inflation and tighter interest rates. Thus, other actions—such as much larger windfall taxes on energy—will be required to maintain economic growth.


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