My City December 2022

MYECON

The Global ENERGY CRUNCH BY DR. CHRISTOPHER DOUGLAS

T he global economy is facing a severe energy crunch heading into winter.The price of crude oil is pushing $100/bar rel due to the continued conflict between Russia and Ukraine, Saudi-led OPEC production cuts of two million barrels/day and domestic oil production remaining one million barrels/day below what it was prior to the pandemic.The 15-million-barrel release from the Strategic Petroleum Reserve (SPR) recently announced by the Biden Administration thus offsets less than a week’s worth of these cuts. More concerning is that nearly half of the SPR’s inventory has been drained since the Russia-Ukraine conflict began and at approximately 400 million barrels, the SPR’s inventory is at its lowest level since the mid-1980s.This puts the U.S. in a vulnerable position if the world’s supply of oil gets further disrupted, since there is limited inventory in the SPR to meet any further disruption. At a minimum, oil prices would further spike. More concerning is the fact that diesel fuel inventories are at their lowest level in more than a decade.The price of diesel has been around $5.50 since February, and these low inventories mean that truckers and farmers reliant on diesel will see little price relief. It is unlikely that the U.S. will run out of diesel be cause at some point, inventories will get low enough that refiners will increase the production of diesel at the expense of gasoline, which will push gasoline prices higher and closer to what diesel prices currently are. Higher oil prices will contribute to higher fertilizer prices, which are already at near record high levels.This will lead to further food price increases after a year when food price inflation has exceeded the overall rate of inflation. The price of natural gas in the U.S. retreated from a record high of nearly $10 per million British Thermal Units (BTUs) so

that it is closer to $4.60 per million BTUs, which is what it was last winter. Assuming natural gas prices don’t change, this costs the average-sized household burning 15 million BTUs a month in the middle of winter about $69, hardly unaffordable to most people. The situation is tragically different in Europe, where natural gas prices went vertical when the war began and then again after the destruction of the Nord Stream 2 pipeline and the severe damage to Nord Stream 1. European natural gas prices are currently $70 per million BTUs, which would cost that same family over $1,000/month. Unless this changes, the European Union is looking at a long, severe recession. The U.S. could increase the supply of oil, which would reduce its price, by encouraging investment in domestic production and ensuring that oil companies face no so called “windfall profits tax” that would “tax away” the profit from such investment.The U.S. could also push for peace in Ukraine, potentially through implementing the Minsk Accords that were negotiated between Ukraine and Russia in 2014, but never implemented. Until these things happen, expect the energy crunch to continue.

Dr. Christopher Douglas came to the Univer sity of Michigan-Flint in 2006. He earned a B.S. in Electrical Engineering and a B.S. in Economics from Michigan Technological Uni versity in 2001, and his Ph.D. in Economics from Michigan State University in 2007. As

Associate Professor and Chair of the Department of Economics, he teaches Principles of Microeconomics, Principles of Macroeconomics, International Economics, Public Finance, and Sports Economics.

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