The Middle Of A Storm
Hang On Tight!
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There is a lot going on in the crude oil markets right now. There are big implications on global pricing of crude oil, energy prices, and ultimately chemical feedstock prices. To me, it feels like we are somewhere in the middle of a storm that started back when Texas froze over in 2021.
The European Union agreed to ban imports of Russian crude oil. Reporting from Stanley Reed of the New York Times indicates that this will mainly bruise Russia, but not cripple them because the ban is going to come into effect at the end of the year. In fact, right now Reed reported that:
Russian oil production is proving resilient as European buyers and others snap up the opportunity to buy crude at a discount of around $30 a barrel to Brent crude, the international standard.
Overall, I suspect that as the reality of the Russian oil embargo permeates throughout global markets we could start to see increases in exports of North American crude to feed European refineries and prices to keep climbing. Gasoline prices here in the United States are really high, but I suspect as the year progresses and once the embargo goes into place they will climb even higher. This is great news for oil companies as high oil prices with relatively fixed extraction costs means higher profits.
In addition to the recent embargo of Russian oil into Europe the oil producing exporting countries (OPEC+) have decided to increase oil production for the months of July and August. Meanwhile, the prices for crude have mainly held constant since the announcement which came out June 2nd. So, despite higher supply in the coming months there is no significant drop in price and likely no respite in transportation costs either.
We need to remember that chemical markets are global and big changes in one part of the world often ripple throughout all of the markets eventually. High feedstock costs mean that everyone downstream from oil will eventually start paying higher prices, but we also need to think about shipping costs and fuel costs. This means even domestic freight costs, which are increasing due to fuel costs and scarcity of drivers, are going up if you can even schedule a carrier to pick-up your stuff. Jen Kirby was reporting on the scarcity of truckers early this year for Vox:
The United States is experiencing a shortage of more than 80,000 truck drivers, according to an estimate from the American Trucking Associations. The ATA also estimates that about 72 percent of America’s freight transport moves by trucks, which shows just how dependent consumers are on the drivers who deliver turkeys to stores or gas to pumps or the Christmas presents you order to your doorsteps.
I find this somewhat ironic since pre-pandemic, which feels like a different lifetime ago, the big talk was about how truck driving wouldn’t be a job that existed in ten years due to automation. Actually, this sort of story is still being reported on, most recently by Axios, but Forbes reports that automation will not impact trucking jobs. It’s hard to know what is going to happen here, but remember when Elon Musk told us he was going to have a fleet of automated Tesla taxis?
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Why We Should Care About This Stuff
For the regular person out there not involved with producing goods to be sold around the world the global supply chain might look like an intimidating monster that is just angry and extracting its revenge through higher prices. Well, it is in some ways, but we also need to remember that for the last thirty years or so multinational companies and even family run local companies have been trying to find an edge through cost cutting and cash efficiency.
If we think about globalization as cost cutting, it’s primarily through outsourcing the labor that would have likely been done here in the United States by someone else in a developing country. The wage differential is huge and that low wage a multinational company is getting in Vietnam or Cambodia might be supporting a whole family living in conditions people in the United States couldn’t imagine. Further, by exporting production costs to lower wage places the environmental standards might be lower and thus less costly.
The model just-in-time shipping meeting a lack of truck drivers, shipping containers, and high fuel prices means that what might have cost 10,000 dollars to ship at the beginning of the year might be 20,000 dollars now for that same route. Just in time manufacturing meant that businesses were cash efficient in that minimal inventories that were carried, less storage space was needed, and that if anything went wrong the system was going to be disrupted. When journalists or investors talk about supply chain fragility they are speaking about the confluence of all of these things coming together into a perfect storm.
As I wrote earlier, I feel as if we are in the middle of the storm. Perhaps we have another year of this stuff happening and I suspect that prices in certain areas will become so prohibitive that economies will start contracting if they haven’t already. At times I feel like a broken record when I write about this stuff, but it’s causing a lot of pain for me and my coworkers in my day job and for everyone that is just trying to get by.
I hope the clouds part and we get to see the sun soon.