Welcome to Elements, our daily energy and commodities newsletter. In today’s take, Javier Blas argues that the tightening of monetary policy needed to fight inflation could have the perverse effect of keeping oil prices high. It is certainly true that diesel prices, essential to the proper functioning of the global economy, are high and rising. To receive items straight to your inbox, click here.
“You can’t print energy!” As the U.S. Federal Reserve raised interest rates to fight inflation, the rallying cry from many in the oil industry has been that monetary policy cannot solve the current energy shortages that are driving prices on the rise.
Central banks — like latter-day alchemists — may be able to print money out of thin air, but their superpower doesn’t extend to the barrel of oil. Is that entirely true, however? After all, it was the era of ultra-low interest rates in America that helped propel the Permian drilling boom. The biggest oil bonanza the United States has seen wasn’t just based on geology, technology, and American ingenuity — the Federal Reserve’s printing presses helped tremendously.
The first Permian oil boom coincided with Ben Bernanke’s era as Fed Chairman. During his time at the central bank, from February 2006 to January 2014, US crude production increased by 60%, from 5 million barrels per day to 8.1 million barrels.
What shall we do now?
Rob West, the founder of consultancy Thunder Energy, said raising interest rates may not dampen inflation “but could actually deepen it, deterring the investment needed to fight inflation itself. same”. According to him, the world is suffering from a shortage of energy and to solve it, it needs more investment and cheap capital.
Energy is one of the most capital-intensive industries in the world, requiring billions of dollars every year to produce additional oil, gas, coal and electricity. As interest rates rise, “developing more energy also becomes more difficult,” West says.
The change in financing conditions is quite dramatic. Look at Shell Plc, Europe’s largest oil major. A few years ago, it issued bonds maturing in 2052 with an initial yield of 1.7%. Today, paper is trading at a yield of over 6.5%.
However, the energy sub-sector most at risk is not fossil fuels, but renewables, where projects tend to be more leveraged, and therefore sensitive to changes in interest rates.
The Fed alone cannot print energy, but it helps those who can. And the central bank is doing anything but help right now.