Cogent Analysis
Those advocating a case for recession in the US have an energy blind spot.
“If you take your foot off the gas, there's always someone who wants your spot.” – Trent Alexander-Arnold
How can you tell the difference between an analyst and an advocate? It is all in the handling of data that runs counter to assertion. To an analyst, being wrong is disappointing, but it is primarily an opportunity to learn—an expected element in a feedback loop of continuous improvement. When knowledge is your only objective, there is no such thing as a bad fact, only one which you do not yet understand. Not so for the advocate. The advocate has tied their hopes (and often their livelihoods) to a specific outcome and feels compelled, whether consciously or not, to rationalize away or attack inconvenient realities. It is advocacy when every perturbation in the weather is tagged as evidence of climate change, each squiggle of unfavorable price action is declared market manipulation, and no act or utterance from a favored politician is disqualifying.
Consider the fate of Russia’s economy in light of sanctions imposed by the West. As we have chronicled from the earliest days of the war in Ukraine, attempting to limit the supply of Russian commodities from reaching the global markets was almost guaranteed to backfire, yet the architects of the strategy continued doubling down. Two years on, the Russian economy is booming, Europe is reeling from a recession, and Ukraine is on its back foot in the war. In a remarkable story published last week in the Financial Times titled “The surprising resilience of the Russian economy,” we learn that mainstream thinkers are still largely in denial. Here are a few choice excerpts:
“The Russian economy’s resilience has stunned many economists who had believed the initial round of sanctions over the invasion of Ukraine nearly two years ago could cause a catastrophic contraction.
Instead, they say, the Kremlin has spent its way out of a recession by evading western attempts to limit its revenues from energy sales and by ramping up defence spending…
All of this would have been impossible if Russia had not continued to generate colossal revenues from its energy resources, despite sanctions…
Other economists argue that Russia’s economy would have grown in consecutive years at a much more sustainable level if Putin had not ordered the full-scale invasion of Ukraine.”
What “many” and “other” economists missed, of course, is the primary role energy plays in determining the fate of an economy and the fundamental nature of how energy markets function. Economies awash in cheap hydrocarbons that are also running fiscal deficits rarely enter into recession. This is especially true for a large energy exporter like Russia that can benefit from elevated global prices while keeping input costs artificially low on the home front. Sanctions effectively allowed Putin to double-dip, harvesting excess profits from his country’s exports while padding the global competitiveness of Russia’s manufacturing base.
In a similar vein, we recently argued that the Biden administration’s move to pause new LNG export approvals would result in a short-term sugar high for the US economy, adding to other energy tailwinds that should keep the country from falling into a recession before the 2024 presidential elections. In the days since the LNG announcement was made, front-month contract prices at Henry Hub have collapsed some 25% and are down nearly 40% from their January highs, proving the signaling power of the presidential action, however cynical it might have been. As US GDP and jobs report prints keep coming in hotter than many advocates in the pro-recession camp expect, they are finding increasingly creative ways to dismiss the data as fraudulent.
Given the ever-increasing role of natural gas across vital arteries of the US economy, its price is perhaps even more important than that of gasoline—an under-the-radar consequence of the shale boom. Just how dependent has the world’s largest economy become on the stuff, and who stands to benefit most from its rock-bottom pricing? What risks might this relatively newfound reliance represent in light of Biden’s move? Let’s put some difficult-to-ignore numbers to the issue and find out.