by Harald Malmgren
As global economic growth slows, the price of oil should be falling.
Instead, fears of disruption of supply are causing users of gasoline, diesel, and jet fuel to increase storage and encouraging traders to speculate on continuing elevation of oil. This is already having the effect of a harsh tax on US household incomes.
The tax effect will intensify as food prices rise. Harvesting, processing, packaging and distribution of food is energy intensive.
Household incomes in the US continue flat, or even slightly negative at an annualized rate of decline of near 1%. Food price rises piled on top of rising gasoline prices will squeeze discretionary spending, with negative consequences for demand for consumer durables.
This would likely result in continued additions to inventories, which are counted as positives for calculation of GDP. Inventories have been growing slowly but continuously for several months.
The recently revised estimate of Q4 GDP growth rate was raised primarily by inventory build, accounting for 2 percentage points out of 3 percent. Real final demand rose by less than 1%.
The composition of this tepid growth in real final demand will likely alter gradually in favor of energy consumption, at the expense of consumer durables. If gasoline rises further, retail spending at gas stations will rise but shopping at malls and online will go down.
The Iranian Factor
Fear of overt conflict with Iran is driving the oil market upwards.
There are growing fears of military conflict in the Straits of Hormuz; fears of possible Israeli attack on Iran; and fears of possible US military action in support of Israeli-initiated action.
Inside Iran, the tightening economic sanctions imposed by the US and Europe are causing serious distress. In response, Iran’s leadership has once again offered to engage in dialogue with the US and Europe, in an effort to slow or even ease the effects of sanctions.
Market fears are too focused on questions of military conflict or no conflict. Iran may respond to pressures on it by changing its negotiating position, by stepping up irregular warfare and terrorism throughout the Gulf and the Levant.
It is quite possible that Iran will make attempts to generate social unrest in Bahrain and other neighboring entities, aiming at undermining the grip of Sunni royal families, thereby strengthening Iran’s negotiating position.
If scenarios of overt attack on Iran are considered, there should also be consideration of “day after attack” scenarios, such as intensified Iran-induced violence throughout the region.
And these “day after attack” scenarios would not just be against or even primarily against Israel, but rather against Sunni rulers and their oil assets. In such scenarios, disruption of oil pipelines, terminals, and other critical oil facilities are possible.
Featured Image: http://www.disclose.tv/forum/iranian-plan-to-mine-hormuz-puts-us-nato-on-persian-gulf-al-t64969.html
As Adm. Habibollah Sayari commander of the Iranian Navy put it Wednesday, Dec. 28: “Shutting the strait for Iran’s armed forces is really easy – or as we say in Iran, easier than drinking a glass of water.” He went on to say: “But today, we don’t need [to shut] the strait because we have the Sea of Oman under control and can control transit.”