The current energy crisis, driven by Middle East conflicts, is set to have a more profound impact on consumers compared to the 2011-2014 energy shock. This time around, the shale patch is unlikely to provide the same level of relief, leaving consumers to bear the brunt of higher energy prices.
Arend Kapteyn, a renowned economist at UBS, highlights the key differences between the two periods. While oil prices were higher during the previous energy shock, the U.S. economy was able to absorb the impact due to the shale boom. The surge in WTI crude prices spurred increased drilling, production, and investment in the energy sector, creating a positive ripple effect on the manufacturing base. However, the current situation is different. The oil sector's responsiveness to price changes has diminished significantly over the past decade, making it less likely to provide a similar boost to the economy.
The Shaky Bullish Case
The Trump administration's view that the oil price shock is temporary further complicates matters. With shale drilling unlikely to increase substantially, the manufacturing base may not receive the same tailwind it experienced during the previous energy crisis. This means consumers will face a double whammy: higher energy prices directly impacting their spending power, coupled with a lack of offsetting investment in the domestic oil sector.
The Gas Pump Shock
The warning signs are already evident. Diesel prices approaching $5 per gallon could result in a 35% jump in prices for U.S. consumers. Kapteyn emphasizes that while oil prices were higher in 2011-2014, the U.S. economy still managed to maintain decent growth. However, the current situation is unique due to several factors. The labor market is weaker, households are more liquidity-constrained, and inflationary pressures are sharper, with oil prices rising almost 100% year-on-year compared to a maximum of 55% during the previous energy shock.
The Role of Shale
A critical difference lies in the shale sector's response to price changes. In 2010, the U.S. mining sector, largely driven by oil and gas, accounted for a significant portion of industrial production. By 2012-2013, it was the primary driver of U.S. industrial production growth. However, after the oil price collapse in 2015-2016, shale investment and rig intensity did not return to pre-2014 levels. While oil production still responds to prices at the margin, investment elasticity has decreased significantly. If current oil prices are perceived as temporary, the U.S. is unlikely to witness a shale-driven supply response similar to the previous energy shock, leaving consumers vulnerable to income erosion.
Global Energy Market Tightening
Overnight developments, including retaliatory strikes on energy infrastructure across the Gulf region and Qatar's warning about potential long-term disruptions to its LNG complex, suggest that global energy markets are set to tighten further. The risk of a pump price shock could dampen sentiment in the coming weeks if energy market turmoil persists. Additionally, signs of stress in credit markets add to concerns about the broader economic outlook.
Conclusion
The current energy crisis presents a unique challenge, with consumers facing the prospect of higher energy prices and a weaker manufacturing base. The absence of a robust shale response, coupled with a fragile economic environment, raises concerns about the potential impact on consumer spending and the overall economic outlook. As we navigate this complex situation, it's crucial to consider the broader implications and prepare for the potential consequences.
