Publications: Notes at the Margin

Deregulation, Drought, Central Banks, and Oil (August 22, 2022)

 

A thirty-year economic transformation has left oil producers and those in the oil industry the victims of deregulated markets and central bankers. The global economy has become increasingly leveraged to markets since 1970. Market after market has been freed from regulation, which has bestowed enormous benefits on many consumers and providers. At the same time, though, legacy producers have suffered large losses or been forced out of business.

 

Global oil consumption in 2023 and through 2030 will probably see a repeat of the 2008 subprime impact, caused this time by the failure of electricity and natural gas deregulation. The effects today, though, will be worse than in 2008. The lack of rain in Europe and parts of North America combined with summer heat will push power and gas prices higher in late 2022 and 2023, adversely affecting economic activity and oil use.

 

Efforts by central banks to contain inflation will further depress economic activity and energy use, especially oil. Here, the many financial economists who expect central banks to ease pressure in 2023 will almost certainly be wrong. The European Central Bank’s primary purpose is to “to keep prices stable in the euro area.”[1] The Bank of England’s responsibility is to ensure monetary stability by “maintaining stable prices.”[2] The US Federal Reserve has a dual responsibility to maintain full employment and price stability. Given the current low unemployment here, the Fed will likely continue its aggressive stance on interest rates.

 

The energy markets’ deregulation, the sweltering summer, and drought are exacerbating inflation, requiring even harsher central bank actions.

 

 

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