China is attempting to re-inflate their bubble with much stimulus. History lessons suggest too little too late and deflation has settled in and already has taken hold.
Don’t forget China and Russia have strengthened economic ties, and both countries have fostered being isolated by the rest of the world. Pretty much they sleep in the same bed.
Russia needs to export oil to pay for the war in the Ukraine. The number of 40% of their economy is paying for either the war or defense. This is a funny number to me that is hard to believe, but this was what has been reported. Earlier this was reported as 30%, and even that number is crazy.
Inflation in Russia is double digit, there is a brain drain, and also a worker shortage. It is suggested that Russia’s economy will collapse sometime in 2025.
Meanwhile because the U.S. has somewhat flooded the market with oil and natural gas and built up stockpiles Saudi Arabia has decided to also flood the market with oil to gain back market share. OPEC and OPEC+ has been undercut, and there are a few members of OPEC that violated and exceeded agreed upon production quotas. One of those countries is Iran.
This is a very big problem for Russia. Saudi Arabia can extract oil cheaply, and to compound that Russian oil is more costly to extract.
A way to frame a possible scenario next year is a replay of what happened in WWII: The Battle Of The Bulge. Pretty much Nazi Germany needed to secure fuel as a lifeline to keep the war going.
Remember how in other posts I outlined how wars are rooted into economics. A slightly different Battle Of The Bulge is evidently underway.
As far as further collateral damage, I don’t think China will escape consequences. There is a lot of ill-will seeded, and the deflation/overcapacity I don’t see going away.
Understand that U.S. oil production too is more costly than Saudi Oil. The old cutoff of spot price use to be around $70.00 a barral. In Canada oil prices had to be around $80.00 a barrel or Tar Sand extracted oil to be Economicly feasible.
In the past the Saudi’s have effectively utilized price wars to dive down prices so that other suppliers of oil loose market share. Wells get shut down and get capped. Business’s go belly up, and pretty much there are cycles of boom and bust. Currently we are booming in the U.S.
The Saudi’s don’t really care about Russia, and the goal in this price war is to get oil prices to gain back market share and disrupt the oil supply and limit the current glut. Pretty much this is targeting U.S. energy production, and Russia is just collateral damage.
The aforementioned economically feasible prices today are likely changed, but I presented the old thresholds to point out that every country is different, but know that Saudi Arabia has a very low cost of production.
In the past the Saudi’s did their price war thing, and wells were capped here in the U.S. Some bankruptcy happened. Know that the costs of shutting down and starting up are costly. Energy here in the U.S. is boom or bust. Also stoping and starting energy production is not like flipping a switch, there are long lead times and delays.
Then consider how energy prices are low today here in the U.S. This helps lower inflation, but what happens when our oil exports no longer help offset our deficits and pretty much energy production slows down and layoffs happen. Energy today is a big/huge part of our economy.
They say 4 out of 5 recessions are caused by energy prices. I hope I outlined a possible probability and the somewhat obvious effects of the next boom to bust cycle that is underway. Pretty much a game changer is underway.
Consider and know that higher energy prices and a economic slowdown here in the U.S. will be inflationary, and inflation still has a toehold. Stimulus during an economic slowdown would also be inflationary. The FED does not have room to move or any good choice.
I would say the debt levels not only in the U.S. but also around the world suggests either a rather protracted recession or even worse stagflation. Know and understand there was a big debt load prior to the last episode of stagflation that started in the 70’s and ended around 1982. There was double digit inflation, double digit unemployment and U.S. bonds had yields of 15% because interest rates had to be raised to cause a recession to reset the economy.
IMHO the failed businesses that were rescued and bailed out inn the past by loans, stimulus and some extreme measures might become vulnerable again. The ammo the FED once had has been expended, and I say no life preserver at this point can be extended.
Cal