Heading for Recession? Two WSJ Reports

Old_Joe

This morning's Wall Street Journal contained two reports- unrelated, but each sharing suggestions of a coming recession.

Following are heavily edited excerpts from those two reports... emphasis in text was added –

Saudi-Led Oil Producers to Lower Output Further

A group of large oil producers led by Saudi Arabia said Sunday they would cut more than a million barrels of output a day starting next month, a surprise move that upset Washington and led to a jump in crude prices amid concerns about the global economy. The output cuts amount to about 3% of the world’s petroleum production taken off the market in seven months.

The production cut will hit an oil market that was widely seen as tightly balanced between supply and demand, meaning it could lead to a longer-term rise in prices. If higher prices last, they could stoke inflation and complicate decisions for central bankers, who are caught between trying to tame rising prices and propping up a teetering banking system.

According to people familiar with the decision, it was negotiated primarily between the Saudis and Russian to get ahead of a global slowdown and raise prices to fund Saudi Arabia’s ambitious domestic projects and replenish Russia’s reserves.

Oil prices had been trending downward since late last year on global recession fears [and] some in OPEC see oil demand taking a hit in a recession. The price moved beyond $85 a barrel after the announcement, before falling slightly.

“Given the preventive nature of OPEC decisions, there is clearly something OPEC knows about demand trends and inventories that we have yet to discover fully in overall supply and demand balances,” said [the] global head of energy strategy at JPMorgan Chase & Co.

An oil analyst at Denmark’s Saxo Bank said the decision to cut production again reflected concerns over the U.S. economy, where interest rates are widely expected to increase.

World Bank Warns of Lost Decade for Global Economy

The World Bank is warning of a “lost decade” ahead for global growth, as the war in Ukraine, the Covid-19 pandemic and high inflation compound existing structural challenges.

The Washington, D.C.-based international lender says that “it will take a herculean collective policy effort to restore growth in the next decade to the average of the previous one.” Three main factors are behind the reversal in economic progress: an aging workforce, weakening investment and slowing productivity.

“Across the world, a structural growth slowdown is under way: At current trends, the global potential growth rate—the maximum rate at which an economy can grow without igniting inflation—is expected to fall to a three-decade low over the remainder of the 2020s,” the World Bank said.

Potential growth was 3.5% in the decade from 2000 to 2010. It dropped to 2.6% a year on average from 2011 to 2021, and will shrink further to 2.2% a year from 2022 to 2030, the bank said. About half of the slowdown is attributable to demographic factors.

Weakness in growth could be even more pronounced if financial crises erupt in major economies and trigger a global recession, the World Bank report cautions.

Earlier this year, the World Bank sharply lowered its short-term growth forecast for the global economy, citing persistently high inflation that has elevated the risk for a worldwide recession. It expects global growth to slow to 1.7% in 2023.

The World Bank identifies a number of challenges conspiring to push down global growth: weak investment, slow productivity growth, restrictive trade measures such as tariffs and the continuing negative effects—such as learning losses from school closures—because of the pandemic.

Some view the World Bank’s projection for a lost decade as too pessimistic. Other organizations, such as the International Monetary Fund and the Peterson Institute for International Economics, a Washington-based think tank, expect global GDP growth to expand a more robust 2.9% in 2023.

Harvard University economist Karen Dynan said that aging populations in nearly every part of the world will be a drag on global growth, but she was more optimistic on raising productivity—output per worker.

yogibearbull

I read that Saudis were hoping that the US will start ordering oil to refill its alarmingly low SPR when oil prices fell. When that didn't happen, the Saudis also went along with OPEC/OPEC+ production cuts to support global oil prices. Of course, the WH issued a statement criticizing the production cuts, but it didn't act when oil prices fell.

The G7 Sanctions on Russian oil have turned into a joke. First, the price-caps for Russian oil were imposed (Yellen's plan?) for non-G7 countries so that the G7 countries could also benefit from what non-G7 countries were doing anyway. This also calmed Europe a bit that has taken the brunt of the G7-ban - although a milder Winter there also helped. Second, G7 recently issued an exception on G7-ban to Japan because it needs oil badly - so 6 more exceptions to go?

stayCalm

The price cap is no longer a real cap if the 2nd richest economy needs an exception.

msf

Also helping Europe is an accelerated shift to renewables as well as an offsetting return to coal.

European Union leaders said the war has had a silver lining in terms of moving the bloc forward on targets for renewable energy. Countries that were previously reluctant to get on board with expanding renewables are finally doing so, and those on the wagon are investing more. As a result, as part of its REPowerEU package, the EU agreed to increase its targets for renewable energy to 45 percent by 2030 this week, up from a prior target of 40 percent. (The EU gets just over 20 percent of its total energy from renewables right now.) A new report from the International Energy Agency suggests the world could add as much renewable energy in the next five years as it did in the last 20 years.
...
But you can’t make silver without getting some dross. In an effort to replace Russian oil and gas in the short term, countries like Germany are reactivating some old coal-fired power plants to fill the energy gap. Countries including France, Austria, the Netherlands, and Italy are putting mothballed coal plants back into service. And EU countries are negotiating long-term contracts for gas with countries like Qatar, which policymakers said could ultimately lock these countries into buying more gas than they hope to need by the time 2030 rolls around.

https://foreignpolicy.com/2022/12/21/europe-russia-energy-climate-change-policy-renewable/

See also World Economic Forum, Can Europe’s rush for renewables solve its energy crisis?, Feb 10, 2023.
https://www.weforum.org/agenda/2023/02/eu-renewables-energy-crisis/

Second, G7 recently issued an exception on G7-ban to Japan because it needs oil badly - so 6 more exceptions to go?

Does Japan really need oil badly?

[Japanese] Government data released on Thursday [Jan 19, 2023] showed that oil imports from Russia fell around 56% last year, while coal imports were reduced by 41%.

But imports of Russian liquefied natural gas (LNG) were up more than 4% in 2022.

Sakhalin-1 produces oil, while Sakhalin-2 produces both crude and LNG, and experts say access to Russian gas is what Japan is most concerned about protecting.

Last year, 9.5% of Japan’s total LNG imports came from Russia, up from 8.8% in 2021 — most of it from Sakhalin-2.

So when Japan joined a price cap on Russian oil last year with its G7 allies, the European Union and Australia, it obtained an exemption for Sakhalin-2.

https://www.euractiv.com/section/energy/news/sakhalin-exception-the-russian-energy-japan-cant-quit/

Japan has almost no fossil fuel of its own and relies on imported natural gas and coal for much of its electricity.
...
“It’s not as if Japan can’t manage without this. They can. They simply don’t want to,” said James Brown, a professor at Temple University’s Japan campus. Prof. Brown, who studies Russia-Japan relations, said Japan should move to withdraw from the Sakhalin projects eventually “if they’re really serious about supporting Ukraine.”

https://www.wsj.com/articles/japan-breaks-with-u-s-allies-buys-russian-oil-at-prices-above-cap-1395accb

msf

stayCalm said:

The price cap is no longer a real cap if the 2nd richest economy needs an exception.

Here’s a look at every country’s share of the world’s $101.6 trillion economy:

Rank	Country		GDP (Billions, USD)
#1	United States	$25,035.2
#2	China		$18,321.2
#3	Japan		$4,300.6
#4	Germany		$4,031.1
#5	India		$3,468.6

https://www.visualcapitalist.com/countries-by-share-of-global-economy/

The 2nd and 5th richest economies never participated in Russian sanctions.

China and India, both of which have declined to condemn Russia or impose sanctions over the war, became the biggest buyers of Russian crude oil last year as Western countries restricted imports and imposed sanctions.

China’s imports of Russian crude oil spiked 8 percent in 2022, the equivalent of 1.72 million barrels per day (bpd), according to Chinese customs data, making Russia the East Asian giant’s second-biggest supplier.

Al Jazeera, How China and India’s appetite for oil and gas kept Russia afloat, February 24, 2023.
https://www.aljazeera.com/economy/2023/2/24/how-china-and-indias-appetite-for-oil-and-gas-kept-russia-afloat

stayCalm

GDP as a whole is a meaningless number. GDP per capita is the meaningful number.

India and China are not generally considered rich economies on a per capita basis, certainly nowhere close to GDP per capita levels of the G7.

No disagreement that China and India have been opportunistic but that's par for the course for most countries where national self interest ranks higher than support of Ukraine.

We were in bed with Osama when convenient and went to war against him when it was no longer convenient. If it suited US interests at this time, India would have been squeezed hard but it isn't being squeezed so...

Times change, alliances change -- shifting sands. As expressed brilliantly in the book 1984 there is always a war going on amongst all the major powers to the point that it becomes meaningless to keep track of who's at war with whom at any given point.

yogibearbull

Japan's Sakhalin exception was done LAST YEAR while formulating the oil price-cap policy, https://english.kyodonews.net/news/2022/11/b7ea9d8ec6d2-us-excludes-oil-for-japan-from-russias-sakhalin-2-from-price-cap.html

The NEW price-cap exception for Japan is recent, https://www.msn.com/en-gb/money/other/japan-breaks-with-western-allies-and-buys-russian-oil-above-dollar60-a-barrel-cap/ar-AA19qoFT

Here are global GDP/capita from the World Bank. Some of the countries at the top may be surprising, but China and India are FAR down in that list. https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?most_recent_value_desc=true

msf

yogibearbull said:

Japan's Sakhalin exception was done LAST YEAR while formulating the oil price-cap policy, https://english.kyodonews.net/news/2022/11/b7ea9d8ec6d2-us-excludes-oil-for-japan-from-russias-sakhalin-2-from-price-cap.html

The NEW price-cap exception for Japan is recent, https://www.msn.com/en-gb/money/other/japan-breaks-with-western-allies-and-buys-russian-oil-above-dollar60-a-barrel-cap/ar-AA19qoFT

I thought so too that they were different, until I reread the WSJ article (April 2, 2023) that I cited and that was referenced in the Daily Mail piece (via MSN).

Check the dates. The Kyodo News piece is dated Nov 23, 2022. It says that the price cap would go into effect on Dec 5, 2022, and that the Sakhalin-2 exemption would last until Sept 30th. That must be Sept 30th of 2023, since it didn't start until Dec 2022.

The referenced WSJ piece is reporting Japanese oil imports from Russia in January and February of this year, under that Dec 5, 2022 - Sept 30, 2023 exemption.

In the first two months of this year, Japan bought about 748,000 barrels of Russian oil for a total of ¥6.9 billion, according to official trade statistics. At the current exchange rate, that translates to $52 million, or just under $70 a barrel. Russia exports millions of barrels of oil a day, making Japan’s purchases a minuscule share of total Russian output.

This was a Saturday piece in the WSJ, not picked up by most major news sources. No independent source. These facts indicate that the WSJ story is background material, not breaking news.

msf

The price cap is no longer a real cap if the 2nd richest economy needs an exception.
GDP as a whole is a meaningless number. GDP per capita is the meaningful number.

Is that Liechtenstein (World Bank 2020 data) or Ireland (Visual Capitalist, 2023), or some other 2nd richest economy importing Russian oil?
https://www.visualcapitalist.com/worlds-richest-countries-2023-gdp-per-capita/

When it comes to impact of sanctions, what matters is the absolute amount of the "leak", not whether the importer has a rich economy, either per capita or on an absolute basis. As the WSJ reported, "Russia exports millions of barrels of oil a day, making Japan’s purchases a minuscule share of total Russian output." At least if we're talking about Japan's imports.

But it makes for an eye-catching headline.