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October 14, 2024 - 11:40am
With inflation in the eurozone falling to 1.8% in September from 2.2% in August, the consumer price index is now below the European Central Bank target of 2%. This has many speculating that we may be reverting back to the post-pandemic norm of very low inflation. The ECB’s monetary policy committee will meet this Thursday, and is now widely thought to be moving to cut rates by at least 0.25%.
Investors are also anticipating that this will be the first in a series of rate cuts. Jens Eisenschmidt, Chief Europe Economist at Morgan Stanley, told the Financial Times yesterday that he expects interest rates to be halved to 1.75% by December 2025. It is not hard to detect some excitement among investors and policymakers about these prospects. The inflation has been very difficult for both groups and a return to low rates and stagnation is a much more predictable, if somewhat depressing situation.
Yet this anticipation of low inflation may be premature. What we have learned in recent years — with inflation induced first by the lockdowns and then by the Ukraine war — is that the main drivers of rising prices are geopolitical events which are hard to predict. The Middle East is currently a powder keg, and if it explodes the effects on inflation might make the past three years look tame by comparison.
Consider that in 2022 Russia accounted for around 12.7% of global crude oil production. When the war in Ukraine started, Russian oil production did not get shut down. Due to sanctions, it instead had to be rerouted to other markets, and this disruption caused the price of Brent to rise to $133 a barrel in March 2022.
In comparison, the Middle East produced around 31.5% of global output in 2023 — or two-and-a-half times Russian oil production. What’s more, 20-30% of global oil production is shipped through the Strait of Hormuz. A disruption in the Middle East would not, as with the disruption to Russian supplies, simply result in oil being rerouted to other markets. Rather, it would cause an actual decline in oil production.
The extent of this decline would depend on how bad the situation got. At the extreme, Iran could impose a blockade on the Strait of Hormuz. This would likely result in a spiralling of the oil price that would be without comparison in modern times. When a similar embargo was imposed in 1973 by the Saudis, oil prices almost tripled from around $3.50 a barrel to around $10.20 a barrel.
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SubscribeIt is worth pointing out that although there was an “Arab oil embargo” which tripled the price of oil, oil is paid for with US dollars.
Until the “Nixon shock” in 1971 the US dollar was guaranteed by the USA as being worth 1/35th of an ounce of gold and was exchangeable for gold by foreign states at that rate. After that the price of gold rose spectacularly
After 1971 the US dollar is merely a fiat currency but assisted by being a reserve currency…the exorbitant privilege.
In effect the Arab states were merely seeking “proper value” for their produce. It is the West which had previously benefited at their expense.
Well summarized. The dollar remains over valued. American consumers thrive off productivity of rest of world particularly Asian nations.
Weak Harris is a world wrecker
As far as I can see Trump has no problem with war with Iran
Watch the BRICS summit on October 22nd. The US dollar is going to lose its reserve status soon, and this is shaping up to be a significant event on that path. Trump has already said that this will be worse for the US than a major war.
Not happening. Yet more of this delusional nonsense about BRICS (the losers club of the world economies).
BRICS is the cryptocurrency of geo-politics, their is some substance, but most of it is hype, as well as a a lot of bad faith.
Would be good if this author could chat with E Luttwak who is proposing hit Iran in the oil barrels. He doesn’t seem to understand inflation or maybe thinks US will avoid it as they have some of their own oil.
Some = enough. The US is a net oil exporter. Not all the right mix, but a net exporter all the same.
‘What we have learned in recent years — with inflation induced first by the lockdowns and then by the Ukraine war — is that the main drivers of rising prices are geopolitical events which are hard to predict. ‘
Your government has committed economic suicide by imposition of sanctions on Russian energy. And covid lockdowns that may or may not have been necessary. You are nearly allowed to say that they may not have been necessary without getting lynched now.
For some reason nobody thought this through very well but now, in these recent years, we have learned that energy war in an economy that uses quite a lot of it, causes inflation.
Your government may or may not be able to prevent serious conflict in the middle east, they haven’t done a very good job out there to be honest, no wonder some of these geopolitical events are getting hard to predict.
The un could do something to help but won’t because they prefer walking out to talking. So the people that are supposed to help stop the middle east from ending up in a very big war can’t be relied upon either. This is helpful in no way what so ever but still we are paying their wages.
I’m not sure a war with Iran is a very good idea given all of the above.