On 17 March 2020, I published one of my most read posts of all time. Back then, we were approaching the heights of the pandemic panic and I said that if you invert current market prices and back out how many years of no earnings growth companies would have to have in order to justify the market levels seen back then. It was easy to show with this calculation that markets were overly pessimistic back then. Little did I know that markets would bottom within a week and then rapidly rebound.
Your reasoning seems to base on the demand side of oil/energy market. However, the current spike of energy prices is caused by long-time under-investment of fossil fuel infrastructures. Let's assume what you project for the demand side is correct. Without picking up the investment, I think the most likely situation is that the energy prices stay high for an extended time. Of course, that should have us bring in the role of renewable energy supply...
I am aware that we have supply side issues but my reasoning is not based on the demand or the supply side but on simple maths. If energy prices stay at current levels then energy price inflation in 12 months from now is 0%. That’s how inflation is calculated. If you want inflation to stay high, energy prices have to rise 50% from current levels and if you believe that will happen that is fine. Yet, I think that is very unlikely to happen, supply side problems or not.
I may have too little knowledge about the energy market. However, I has been through a crazy shipping market since late last year when the demand picked up with a highly pressured supply side. The result is cost of a 40ft container shipping from Taiwan to USA goes from USD1600 to USD10,000. But I get your point. To have a high inflation into next year, we should have a 50% oil price increase. Without that, any further fear or worry isn't needed. Hope we won't get to a low growth/high inflation environment..
Of course it a blog - not a whole PhD paper, so we should judge accordingly.
A relatively small positive or overall negative effect of oil prices on inflation over the next year looks to be the most likely outcome, just by looking at the historical numbers and comparing to current situation.
People are getting their knickers in a twist because it's $81-ish per barrel. These people need to calm down and read the numbers, like JK does.
I did my best calm things down a fortnight ago by riding my bicycle past queues at the petrol station shouting "What f****** shortage?" at the people queuing - but nobody seemed to listen.
Your reasoning seems to base on the demand side of oil/energy market. However, the current spike of energy prices is caused by long-time under-investment of fossil fuel infrastructures. Let's assume what you project for the demand side is correct. Without picking up the investment, I think the most likely situation is that the energy prices stay high for an extended time. Of course, that should have us bring in the role of renewable energy supply...
I am aware that we have supply side issues but my reasoning is not based on the demand or the supply side but on simple maths. If energy prices stay at current levels then energy price inflation in 12 months from now is 0%. That’s how inflation is calculated. If you want inflation to stay high, energy prices have to rise 50% from current levels and if you believe that will happen that is fine. Yet, I think that is very unlikely to happen, supply side problems or not.
I may have too little knowledge about the energy market. However, I has been through a crazy shipping market since late last year when the demand picked up with a highly pressured supply side. The result is cost of a 40ft container shipping from Taiwan to USA goes from USD1600 to USD10,000. But I get your point. To have a high inflation into next year, we should have a 50% oil price increase. Without that, any further fear or worry isn't needed. Hope we won't get to a low growth/high inflation environment..
Totally agree with you. And I think we are on the same page :-)
This is clearly written and makes good points.
Of course it a blog - not a whole PhD paper, so we should judge accordingly.
A relatively small positive or overall negative effect of oil prices on inflation over the next year looks to be the most likely outcome, just by looking at the historical numbers and comparing to current situation.
People are getting their knickers in a twist because it's $81-ish per barrel. These people need to calm down and read the numbers, like JK does.
I did my best calm things down a fortnight ago by riding my bicycle past queues at the petrol station shouting "What f****** shortage?" at the people queuing - but nobody seemed to listen.