Publications: Notes at the Margin

Turning Point (October 4, 2021)


OPEC issued its long-term forecast on September 28. The Reuters story that summarized it began, “Oil demand will grow sharply in the next few years as economies recover from the pandemic, OPEC forecast on Tuesday, adding that the world needs to keep investing in production to avert a crunch despite an energy transition.”[1] The organization’s timing could not have been worse. Forecasters have a terrible record when it comes to turning points. In our view, though, the world has reached one. A few years from now, many will wonder how anyone could dream that oil use would continue increasing.


We base our turning point conclusion on the grim stories that have spread across the press recently. We had to go back almost fifty years to 1973 to find a situation as bad as the one today. Consider the following energy-related developments from the last two weeks.


Natural gas prices in Europe have risen by three hundred percent. Our September 27 Notes at the Margin discussed the price surge through mid-September. The rise continued last week. The increase stems from a gas reserve shortage that can only be eased by a consumption decline. An economic downturn into recession or worse would boost the chances of such a decrease coming about.


The price impact of natural gas demand shortfalls is spilling over to oil and coal. Bloomberg has noted the sharp jump in carbon, electricity, natural gas, and coal prices in Europe since January 1. Carbon prices have risen from €33 to €67 per metric ton. German power rates have increased from €50 to €105 per megawatt-hour. Natural gas has gone from €19.1 to €75.3 per megawatt-hour. Coal has moved from $68 to $139 per ton. In every case, prices have more than doubled. To put matters in perspective, wholesale energy prices in the United States rose by less than twenty percent from January 1974 to January 1975. The situation in Europe seems three or four times worse than what the US experienced nearly five decades past.


Sixty-one container ships lie anchored off the California coast. They are waiting to unload at the Port of Los Angeles or Port of Long Beach. A further 29 ships are “adrift” off the California coast, waiting to anchor.[2] The backup is fouling supply chains across the US. The chaos is being exacerbated by a shortage of truck drivers, storage space, and containers. The latter often get parked at warehouses to await offloading.[3]


Meanwhile, a shortage of electricity in China is forcing factories to shut. Reuters’ John Kemp reports that electricity use has surged by thirteen percent in China over the first eight months of 2021 compared to those months in 2020.[4] Most of China’s power comes from coal-fired stations, which increased output by fourteen percent. However, Chinese coal production is up only six percent due to the Covid?19 impacts and safety issues. Inventories have been drawn, and coal prices have risen from $90 to $210 per ton. China is also trying to cut coal consumption to reduce emissions. This action has led to power outages at manufacturing hubs. As The Wall Street Journal notes, many plants are closing, cutting production of vital goods such as computer chips.[5]


Consumers are lining up to buy gasoline or diesel fuel in the United Kingdom due to a shortage of tanker truck (or lorry) drivers. A Reuters’ story explains that many UK drivers laid off during the pandemic have decided to do something else.[6] As the article notes, “The haulage industry has warned for years that deteriorating conditions are putting workers off but the problems came to a head this month when retailers and oil companies said they did not have enough drivers to fully maintain operations.” Wages are being upped but attracting few workers. The driver situation in the US is terrible as well.


The computer chip shortage is constraining automobile production. 3M’s chief financial officer told an audience at a Morgan Stanley conference that the deficit that has idled auto factories worldwide will likely last into 2022 and cut auto output by six percent from 2020.[7]


These and other stories point to a significant economic problem. However, the impact cannot be translated into inputs to the models used to forecast economic growth. Thus, forecasters still optimistically see continued growth in 2021 and 2022. They are wrong.


Our view is that the global economy will experience an economic upheaval over the next twelve months comparable to the 1973-1974 experience absent aggressive central bank interventions and government spending boosts in all countries. Click this link to view a table that presents our calculations. Click this link to view the energy price impact in terms of share of energy spending of OECD GDP.



[1] Alex Lawler, “OPEC forecasts oil demand rebound before post-2035 plateau,” Reuters, September 28, 2021 [].

[2] Gregory Schmidt, “A Record Number of Cargo Ships Off the California Coast Shows a Crack in the Supply Chain,” The New York Times, September 23, 2021 [].

[3] Costas Paris and Jennifer Smith, “Cargo Piles Up as California Ports Jostle Over How to Resolve Delays,” The Wall Street Journal, September 27, 2021 [].

[4] John Kemp, “China’s widening electricity crisis caused by coal crisis,” Reuters, September 28, 2021 [].

[5] Stella Yifan Xie, Yang Jie, and Stephanie Yang, “China Power Outages Pose New Threat to Supplies of Chips and Other Goods,” The Wall Street Journal, September 27, 2021 [].

[6] Victor Jack, “British truckers: life on the road with people smugglers, fuel thieves, and few toilets,” Reuters, September 27, 2021 [].

[7] Ryan Beene, “3M Doubles Its Estimated Drop in Car Output on Chip Shortage,” Bloomberg, September 13, 2021 [].



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