No respite. For besieged US Treasurys, I mean.
Yields rose across the curve in the earliest of this week’s trading, with 10s hitting 5.23% and twos 4.93%. The catalyst: Oil, of course.
Brent flirted with $109 Monday despite the resumption of exports from the Saudi port of Yanbu, which is receiving crude again following repairs to a key pipeline connecting the Kingdom’s oil heartland to the Red Sea.
Crude’s march higher was a response to news that Donald Trump rejected an Iranian proposal to reopen the Strait of Hormuz. Some reporting suggests Trump expects to resume the American bombing campaign after the midterms.
At the same time, the administration’s “very seriously” considering the institution of restrictions on diesel exports, Trump said late Sunday, while watching a golf tournament in Illinois.
“That can lead to a little bit of an increase on gasoline for cars,” Trump mused, in the same off-the-cuff remarks to reporters. “So we’re looking at it. We may do it.”
Unless you’re Chuck Grassley or someone else who needs the farm vote, that’s not music to your ears. Rather, it’s nails on a chalkboard.
Export controls will almost surely backfire, and even if they don’t, whatever temporary relief they might bring about domestically doesn’t justify the risk of exacerbating the global supply shock.
All of that said, it’s unquestionably the case that the inexorable rise in diesel prices constitutes a clear and present danger to the US economy. I dare say most US presidents would be pondering some manner of limited export controls right now, despite knowing the pitfalls.
Diesel prices above $6.50/gallon, “rais[e] the specter of higher prices on everything from food to core-goods, as elevated transportation costs are passed along to the end user,” BMO’s Ian Lyngen said Monday, noting that elevated fuel costs will continue to raise questions about a breaking point for the heretofore resilient domestic spending impulse.
“The assumption that the US consumer (and therefore aggregate economy) can withstand another leg higher in core prices is the essential underpinning of the selloff in Treasurys,” Lyngen added, in the same note. “After all, if investors believed WTI crude near $100/bbl would trigger an economic slowdown of significance, then 10-year yields wouldn’t be at 5.23% this morning.”
This feels unmistakably like the boiling frog apologue, both with respect to the consumer and stocks. Eventually, the de facto consumption tax from the war (not to mention the tariffs) will erode discretionary spending, the same way ever higher yields will by and by undercut equities.
One way to address all of the above is to end the war. I doubt one in 1,000 American voters is more concerned about Iran’s ramshackle, Pinky-and-the-Brain-style nuclear program than they are about fuel and food prices.
Someone (?) is giving Trump very bad advice. Then, when it doesn’t go “as expected”, they are doubling down.
Trump never has a plan and always doubles down.
“The Escalation Trap: Is America’s Strategy in Iran Backfiring?”
https://www.thegreatsimplification.com/episode/235-robert-pape
How being a bully causes a fight or flight response vs. a giving in. If you know more punishment is coming you fight back. Also if you were already looking for a reason to fight then all the better if the bully starts the fight. Interesting interview – Iran is now leading this war.
“so for weeks now, we have
been hearing that there are people, quote, in the administration thinking seriously
about tactical nuclear weapons against Pickaxe Mountain.”
“What that is,…, is preparing the public for future operations against
Pickaxe Mountain. Now that– why would that be important? Because what I’m
describing to you is exactly the dynamic, okay? Which is, once you see these
operations at Pickaxe Mountain, you see right away that this is heading toward an
October surprise.”
This morning I read that some folks in the industry are calling for a suspension of the diesel excise tax instead of export controls. No mention of whether that would have a similar impact on diesel prices. (The only downside mentioned was that an excise tax holiday would be difficult to implement with the House not in session.) Rational or not, the embargo would make a bigger splash which is something the WH seems to like.
That said, which constituents are the folks in the White House most concerned about? Voters in the farm belt or voters in the oil producing states? Which happens to include Texas where Ken Paxton needs all the help he can get in the upcoming election.
Election day is fast approaching, and an embargo, even if implemented tomorrow, will take time to have an impact at the pump. As such, if Trump is serious about implementing export restrictions, he should do it immediately. I presume he realizes that (or at least the people advising him do), so it raises the question: why hasn’t he done it already?
I can think of a few answers. It may be that he just doesn’t plan on doing it, but he likes to string people along. Being unpredictable is a big part of his brand. It could be that he’s genuinely suffering from indecision. It’d be a big step, and it will really hurt a lot of friendly countries that have been keeping relatively quiet about our Middle East adventures.
My guess is that he’s waiting to see which faction makes him the best offer. Will the farm & transportation lobbies make the biggest donations to his PAC or will it be the oil lobby? The safe bet is on the latter, not only because of their size and deep pockets, but also considering they’ll be joined by every international buyer of diesel. The United States is the biggest diesel exporter in the world, and an export embargo would have massive consequences, consequences that plenty of people would be willing to buy some World Liberty Financial Coin in order to avoid.
I detect cynicism.
I read somewhere in the last few days that the US produces more diesel than it consumes. I’m not sure creating even more surplus through export controls would do much. On another note, if history is a predictor, if you give Trump a good choice and a bad choice, he has an almost unequaled ability to choose the bad one.
Or is that a choice that maximizes pain for supporters? Gotta love the spankings.
The US produces more diesel than it consumes, so it exports about half of production. Domestic gasoline production equals domestic consumption. If diesel exports are banned, the available diesel storage will fill up and refineries will cut runs. The result will be lower gasoline production and higher gasoline prices. I’m not sure of the timing.
They will try and mitigate through crude slate selection. We can also export some gasoline into a fading market
Probably the big ah brain hasn’t closed the oil longs yet. I’m sure he’ll find the exact perfect time to do that.
I think frog soup not done yet.
From Sept:
“The Escalation Trap: Is America’s Strategy in Iran Backfiring?”
https://www.thegreatsimplification.com/episode/235-robert-pape
Robert A. Pape is Professor of Political Science at the University of Chicago specializing in international security affairs.
His publications include Dying to Win: The Strategic Logic of Suicide Terrorism and Bombing to Win: Air Power and Coercion in War. His newest book, Our Own Worst Enemies: America in the Age of Violent Populism
From April:
“This War Changes Everything: Are We Ready for Energy Shockwaves From the Strait of Hormuz?”
https://www.thegreatsimplification.com/episode/218-rory-johnston
Rory Johnston is a Toronto-based oil market researcher, the founder of Commodity Context, a lecturer at the University of Toronto’s Munk School of Global Affairs and Public Policy, host of the Oil Ground Up podcast, as well as a Fellow with both the Canadian Global Affairs Institute and the Payne Institute for Public Policy at the Colorado School of Mines