By John Richardson
ONE way of looking at the world is that central bankers know exactly what they are doing as they are Masters of the Universe.
These bankers have excellent degrees and doctorates from top universities bursting out their CVs, along with fantastic track records of rescuing the global economy, I have often been told. So this means that mere mortals, such as you and I, simply have to sit back and wait for those who run the Fed, the European Central Bank (ECB) and the People’s Bank of China to deliver sustained economic recoveries.
This view was very much in evidence during last week’s Asia Petrochemical Industry Conference (APIC) in Seoul, South Korea, where one delegate, for example, told me: “Just look at the industrial revival that the Fed has achieved in the US, thanks to the low interest rates that have driven funding of the oil and gas boom. Now all we need is for something similar to happen in Europe, via the ECB’s quantitative easing (QE) programme.
“The problem with the ECB is that it has been very late to adopt QE, unlike the Fed which wisely got going with its own QE programme soon after the Global Financial Crisis. So I worry that the ECB has left it too late to trigger the kind of new industrial revolution that we have seen in the US.”
I strongly, strongly disagree with the above way of viewing the world. Here, just looking at the actions of the Fed only, are some of the reasons for my disagreement:
- Ben Bernanke, the former Fed chairman, estimated that the cost of the sub-prime crisis would be up to $100 billion. In terms of the net worth of US households and non-profit organisations alone, the total of their net worth fell from a peak of approximately $67 trillion in 2007 to a trough of $52 trillion in 2009, a decline of $15 trillion or 22%.
- Since the 2008 Global Financial Crisis, the Fed has, in effect, poured more good money after bad money. By this I mean that the Fed had added $4 trillion to its balance sheet – 25% of the US economy – with most of this lending ending up back in the hands of the same type of speculators who were behind the sub-prime crisis in the first instance. These are the types of financial players whose only stake in the global economy is to make money in the short term, regardless of the longer-term damage that they end up inflicting on the lives of the rest of us.
- They key for me remains the Fed’s failure to recognise that no matter how much liquidity it throws at the US economy, this will not address the simple fact that the US is having far too few babies. An ageing population amongst the people, who, sadly, count the most economically – the prosperous middle class in the US – guarantees a secular, long term decline in economic growth.
- If the Fed, along with US politicians, were truly Masters of the Universe, they would have already found ways of addressing this demographic crisis. Watch out for my blog post on Friday, where I will make some more suggestions about what needs to be done in the US to revive its economy.
This might all seem a million miles high and so of little or no relevance to the day-to-day problems of running a chemicals business. But I think that this opinion could also not be further from the truth – and here, again, are my reasons why:
- There was no sustainable US industrial revival thanks to the Fed. Instead, some $1.2 trillion was invested in US shale oil and gas reserves alone between 2010 and 2015. Much of this debt will now have to be restructured as it becomes more and more apparent that the US has played a big role in pushing global energy supply way beyond demand. This oversupply in energy will add to demographics-driven global deflationary pressures.
- True, truck drivers in North Dakota and welders in Texas etc. made fortunes from the oil boom. But many jobs have been lost since the collapse in oil prices as shale-oil producers have cut costs.
- And because US shale-oil producers face both lower oil prices and big debt repayments, innovation in fracking techniques is accelerating. Yes, this is great for the US in terms of its technology prowess. But I do not think that the oil and gas sector will create anywhere near enough long term well-paying middle class jobs. This innovation also means is that the breakeven cost of producing a barrel of oil in the US will continue to fall – hence, greater deflationary pressures.
- And the nature of the shale-oil process means that you can turn wells on and off in a matter of weeks. So this guarantees that when oil prices start to edge up, so will shale oil production, which is exactly what we are seeing today with prices back above $60 a barrel.
- So what the Fed has, in effect, done is to add to oil-market volatility, making planning very difficult for chemicals companies. “In many ways, it [shale oil] is similar to the ‘every man for himself’ mentality that plagued the Pennsylvania oil rush in the 1860s and 1870s, which helped to contribute to the endless booms and busts during that era,” wrote Izabella Kaminska in the Financial Times.
What should chemical companies therefore look out for as they seek to navigate oil-price volatility, and commodity price volatility in general, in the second half of this year? I will answer this question in my post tomorrow.