The world energy shock is coming - Isabella Weber, Gregor Semeniuk
Do you remember the days when the world already knew that there was a Covid-19 outbreak in Wuhan and that it was spreading rapidly, but you were not under lockdown yet? An in-between moment when it was clear a catastrophe was coming, but not what it meant. This stage of the US and Israel’s illegal attack on Iran is another such moment. The shock is here. The shockwaves are on their way.
One fifth, one third, one third, two fifth, nearly one half – these are the respective shares of global exports of liquefied natural gas, crude oil, fertilisers, helium and sulphur normally passing through the Strait of Hormuz. Our research shows that these are essentials the world economy depends on. Fossil fuels are by far the most systemically significant inputs in (as yet) predominantly fossil fuel-powered capitalism. Food production depends on fertilisers. Helium and sulphur are necessary for microchips production, in turn needed for everything from lawn mowers to data centres sustaining the AI boom. The passage through the strait of these raw materials – key for making everything else – has been effectively suspended since the beginning of the war.
One of the lessons of the Covid supply crisis was that even a momentary blockage of trade’s flow provokes massive disruptions. Remember the images of traffic jams off major ports? Now add the production side to this. Since local storage facilities for oil and gas have filled up behind the Strait of Hormuz, several production sites have had to stop production – they are “shut in”. Supply is not just slowed but simply not there. And you cannot switch oil fields or refineries back on overnight, it can take weeks or months to do so. Moreover, production and transport infrastructure has been damaged. And as fertiliser is produced with gas, and sulphur and helium are by-products of oil and gas production, these chemicals are no longer produced either.
[...] European and US consumers are still, for the movement, relatively insulated, even if they already see elevated gasoline prices that bring a major cost burden to households. The full scale of the effects to come remain hidden in the complexity of the global supply network. Here is a sketch of what might be coming: inflation, redistribution shocks, shortages, stagflation and global financial instability.
[...] Most of today’s global economy is run by giant corporations that set their own prices, and our research shows that cost shocks helped them coordinate price hikes. They did not swallow the cost of pandemic and war but pushed it on to consumers, protecting their margins and lifting their bottom line in the process. This is sellers’ inflation. Corporations transmit price explosions in essential inputs across the whole economy through their own price setting, ultimately causing inflation.
Such corporate price hikes become even easier when inputs are not just more expensive but in short supply. This grants companies a temporary monopoly.
[...] There is a real threat that many consumers will not only have to pay more but will be priced out of the market for goods altogether. Shortages will rip apart societies and run along international fault lines. They are already a reality in the most exposed fuel importers in Asia. And affluent economies buying up what remains of supplies will leave people in developing countries without the physical product.
Most worrying are food shortages. The disruptions from Covid, the war on Ukraine, all exacerbated by climate change erased more than a decade of progress on combating global hunger. But that was a world food price crisis – there were no physical shortages globally. Now, with some 40 per cent of fertiliser exports at risk at the time when key markets from the US to India have a planting season, food output decline during the next harvest is a real risk. What would manifest as a price shock in the Global North, would devolve into a food shortage crisis in import-dependent regions in the Global South.
[...] Sellers’ inflation only benefits business so long as the output destruction is not too large. If a prolonged strait closure exacerbates shortages and too much production ends up going offline due to shortages, the recession that follows could also hit profits. It would definitely lead to unemployment, which in turn would make it very hard for labour to have wages keep up with inflation. So, the worst case scenario from a macroeconomic perspective is stagflation. While some stocks are booming on war profits, the stock market as a whole could lose much value, and credit default rates go up, with risks for financial stability. All of this will lead to major political fallouts. (x)
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