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Kelly Evans: The Everything Shortage

CNBC

A few BP stations couldn't get fuel because of a lack of truck drivers, and next thing you know half of Britain is out of gas, thanks to panic buying. Now, an isolated problem has become a national nightmare. 

This is how the pandemic is still leaving deep marks on society, unleashing one lollapalooza event after another after another. Everything is a "perfect storm," where it's not just one, but two or three or more major contributors provoking a bigger crisis. Everything is out of whack. Perhaps if we didn't have the Delta variant, these reactions could have been more contained. But here we are"Nike doesn't have enough sneakers to sell for the holidays. Costco is reimposing limits on paper towel purchases. Prices for artificial Christmas trees have jumped 25% this season," to quote the WSJ.  

But even toilet paper shortages don't feel as scary as fuel ones. How serious is it? That depends on which fuel we're talking about. Ironically, natural gas is a bigger worry than diesel and gasoline. No one is actually warning that Britain is going to run short of driving fuels--they just need truckers to get the fuel to where it needs to be. Same for the U.S., which is still one of the world's biggest oil producers. This isn't like the 1970s, when OPEC literally stopped sending oil to the U.S. in the midst of the Arab-Israeli war.  

It's a different story for natural gas, which is a key provider of heating and electricity. Again, the U.S. is relatively sheltered from the global crunch, since we are one of the biggest producers of it. But our prices are still jumping as the shortage is sending gas prices skyrocketing overseas. European and Asian nations, not to mention Southern hemisphere ones, are fighting for liquefied natural gas that can be shipped from places like the U.S. as supplies from Russia to Europe have dried up. Any moment now, I would expect politicians to start calling for a ban on U.S. LNG exports.  

Can it be fixed? Normally, yes. Remember that betting on ever-rising commodity prices has generally been a losing game, as evidenced by the famous 1980 bet where biologist Paul Erlich, author of The Population Bomb, asserted that the price of raw materials would keep going up. Business professor Julian Simon took the bet, and won. In 1990, the price of the five metals Erlich chose had all fallen in real terms. There's a reason why commodities traders all know "the cure for higher prices is higher prices." Higher prices induce expanded supply, and prices eventually reset.  

Is this time different? If yes, it means that this time, supply won't expand. Since this is no "peak oil" or "peak gas" scare, where people fear we are actually running out, either the price will soon rebalance (witness lumber, 2021), or something else must be going on. 

That "something else"--which will be blamed if prices don't reset--includes (a) carbon caps imposed by policy makers, especially in the EU, which are pushing up the carbon price and causing fossil fuel producers to drop out; (b) the ESG investing trend which is raising the cost of fossil fuel production;  (c) oil and gas investors also trying to prevent "too much" drilling from wiping out their profits, as has happened before; and (d) the demise of coal, even in China, where the promise of "blue skies" and the upcoming Olympics showcase event are causing bad energy shortages there--because the obvious replacement fuel is lower-emitting natural gas, which is in global short supply and exorbitantly expensive right now. 

 So yes, the chase is on, and the energy sector I think is back to being the best performer in the S&P 500 year-to-date, and everyone's got their hopes up for high returns. But if you think energy prices can stay this high for long, you're now betting against the interests of pretty much every global policy maker, who will more likely than not quietly hasten more production even while pressing on with clean energy goals. Not to mention energy consumers who look at the price spikes and shortages and go you know what, maybe an EV isn't the worst idea. And that's how you get long-term demand destruction, which is another to way to "cure" high commodity prices.  

See you at 1 p.m! 

Kelly

Twitter: @KellyCNBC

Instagram: @realkellyevans

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