Rising Energy Prices Threaten the Economy — and Energy Stocks, Too - Barron's

Energy prices have increased rapidly, raising concerns about the impact on the global economy.

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For much of the past year, the rebound in energy prices from bottom-basement lows during the Covid-19 pandemic has been seen as a good thing—a sign the world is coming back and moving around once again. But the surge in prices of nearly all energy sources in the past week is now starting to look more ominous.

The rise in prices threatens to derail economic progress in several countries, and it could even start posing a threat to the energy companies that are benefiting today.

Natural gas prices hit new records in Europe and Asia on Wednesday, with the Asian benchmark price rising above $50 per million British thermal units, versus $5 a year ago. Oil prices have also hit multiyear highs, with international benchmark Brent crude futures closing on Tuesday at $82.56 per barrel, the highest since 2018. Prices dipped on Wednesday after Russian President Vladimir Putin said that Russia would send more gas to Europe this winter.

Some analysts have adjusted their models to take into account the new oil and gas dynamics, arguing that high prices will be persistent. But Citi analyst Alastair Syme wrote this week that “talk of ‘new paradigms’ needs to balance the increasing risk of demand destruction, with the world’s energy bill now approaching historical highs.” Syme says high energy prices are “a real head-wind to the global economy.”

“There are of course already strong signs of demand-rationing, with parts of Chinese industry being mandated to cut back and high gas prices impacting on the fertilizer industry in Europe,” he wrote.

It isn’t just a problem for companies that use energy. Energy producers themselves could be hurt if companies cut back on their products. Syme says that international oil companies, or IOC s—which would include big names like Exxon Mobil (XOM) and BP (BP)—are trading as if a long period of high prices is a given. He’s not so sure. “Chasing IOC equities from here increasingly looks dependent on those ‘new paradigm’ economics holding firm,” he wrote.

In addition, high prices could become a political concern—rising diesel costs were one factor behind “yellow vest” protests in France a few years ago. Politicians in various countries could act swiftly to curb costs or limit energy exports if shortages persist. Last month, a U.S. trade group representing chemical, food, and materials manufacturers asked the Energy Department to limit exports of natural gas. That kind of action could quickly end the party for energy producers and exporters.

Historically, fast-rising oil prices can foretell recessions, and arguably help cause them. Oil shot higher before the dot-com bust in 2000. It also rose sharply ahead of the financial crisis, though prices kept spiking until the end of that recession, before dropping and then rising again—an imprecise signal at best.

This time, there are other warning signs that the global economy is shaky. Inflation is rampant, and growth in China appears to have slowed. The International Monetary Fund has forecast the global economy will grow 6% this year and 5% next year.

Michael Arone, chief investment strategist at State Street Global Advisors’ US SPDR Business, said in an interview that higher energy prices will hurt manufacturing economies like China and Germany, which will have to pay more to power their factories. And it could affect high-consumption countries like the U.S., where people will have to shift some of their discretionary spending to pay higher gasoline prices.

“I do think it’s likely to curtail economic growth and continue to increase inflationary pressures,” he said.

But as for whether it could spark or foretell a recession, he’s not convinced.

“I don’t expect the rise in oil prices to result in a recession,” he said. “I do think OPEC and its partners combined, even with the U.S., have the ability to increase supply to address any of these risks,” he said.

He also doesn’t expect the Federal Reserve or other central banks to raise interest rates to try to slow inflation caused by energy costs. “I think the Fed and other central banks will hold on to this idea that this is transitory, it’s temporary until supply comes back on,” he said. “The other issue is that I think central banks and the Fed in particular would be more inclined to raise rates if it was a demand issue, if demand was increasing rapidly.”

Write to Avi Salzman at avi.salzman@barrons.com

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Rising Energy Prices Threaten the Economy — and Energy Stocks, Too - Barron's
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