Posted May 04, 2022
By Sean Ring
Energy to Inflation to Spending
- No matter what the NGOs say, we need energy - cheap and effective energy.
- When energy prices go too high, inflation results.
- When inflation kicks in, consumer spending is lower.
Energy: Oil and Gas
Energy is the cornerstone of the global supply chain.Whether or not we admit it is a vastly different story.Natural gas prices have moved to a record during the Shale Revolution, just now taking out the 2007 highs.Natural gas is a critical component of everything: electricity generation, heating homes, andpowering facilities.Its also a key input to everything from petrochemical creation to refining and fertilizers.Energy prices have risen across key variables driven by under-investment, political turmoil, and geopolitical shifts.As supply remains constrained, we can only get a meaningful adjustment through demand reductions.Another vital factor is diesel prices, which have been relentlessly rising.Diesel prices have just hit a new record, driven by global shortfalls that are unlikely to fall back to normal in the near to intermediate term.There is no quick solution to creating more diesel without a sharp drop in demand.The last time we saw this kind of move was in 2008, and it only started to move lower after demand fell off a cliff.Diesel prices hit every part of the supply chain, and given the current storage levels globally, we are in a tough spot to see this drop off without some extensive pain.Diesel surcharges are now included in delivery breakdowns, and it has added more to the underlying cost of many items.Typically, fuel and labor are straight pass-throughs to the end-user.Diesel is more expensive than ever.
Got Crude?
When a refiner creates 1 barrel of diesel, it also creates about 2 barrels of gasoline, and its hard to adjust that ratio.But a key issue is the type of crude available because there are a wide variety of crude grades.Europe and the U.S. have stopped importing Iranian barrels and are shunning Urals (Russian crude), adding to the shortage of distillate.Ive mentioned before in the Rude this is one of the main reasons I oppose Russian sanctions. We simply need the Urals crude to make our fuel.These barrels typically yield a higher distillate cut during the cracking process that creates different refined products like gasoline, diesel, kerosene, and propane.The distillate is the liquid product condensed from a vapor during the distillation process.
- sweet/sour (how much sulfur is in it)
- heavy vs. light (the API gravity or viscosity of it)
- TAN (acid)

Are Workers That Expensive?
Labor and fuel are typically a straight pass-through, only moving higher across the board.As March-June typically sees a big hiring boost, we had employment costs move back to new highs.Given the tightness in the labor market, companies are paying up to bring on new employees.Inflation, but not as much Wage Inflation as youd think
Consumer prices are already hitting John Q. Public hard.Wages have failed to keep pace, which will keep the pressure on retail sales.
GDP, CPI, and Spending
The US consumer makes up 70.5% of GDP.The G7 ex-US average consumer is 60% of GDP, which gives you an idea of how much the US consumer buys relative to his international cousins.As the U.S. consumer goes, so does U.S. growth.The slowdown is causing a big step up in inventories, resulting in a slowdown in new orders.The consumer now faces a mountain of price increases, wages that have risen but not enough, and elevated inventories.This is a recipe for Im going to skip the store this week or Im not going to buy that (insert item) right now.The below chart shows the savings rate has taken a nosedive, while inflation rates push to a multi-decade record.
Wrap Up
Energy is expensive, which leads to higher costs, which eats into disposable income, which eats into discretionary spending.And since were not spending as much, manufacturing is down into contraction territory.It seems like the natural result of unnaturally low interest rates, fatuous fiscal policy, and reckless monetary policy.But hopefully, this gave you a roadmap from energy to end-user.Until tomorrow.All the best,SeanP.S. If you havent caught my interview with Addison Wiggin, check it out here. We talk about Russia, China, and US policy. Watch on 1.5x speed to get the details and none of the verbal graffiti. Enjoy!Even Donald Trump Needs a Second Passport!
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