Things are about to get even more chaotic yesterday when the OPEC+ cartel decided to drastically cut oil supply and push up prices. On the one hand, when OPEC was first established and pushed up prices, while major disruption was caused to oil-dependent countries, the subsequent substitutions (home heating scrapped, large cars replaced by smaller ones, etc.) were ultimately beneficial. So, given that we need fewer cars on the road and fewer car kilometers, one might think this is a good move. But given the way global central banks and treasuries are behaving now, the short-term impact of the OPEC+ decision would be very damaging. How citizens withstand any additional inflationary pressures that may arise will depend on the response of fiscal and monetary policy. We have two diametrically opposed models: the one that most countries are following (rate hikes and tightening) and what Japan is doing. I explain the difference below and predict that the latter will lead to better results for people.
OPEC cuts production
OPEC’s advantage is that non-OPEC producers, including Russia, agreed to support the production cuts proposed by OPEC’s 13 countries in 2016.
according to– Oil Market Report – September 2022 – Released by the International Energy Agency (IEA), Russia’s oil production is expected to fall further by the end of the year due to the constraints of the EU embargo.
However, even with this reduction, the IEA estimates:
Such losses would still leave the market oversupplied in 2H22, approaching 1 mb/d, and roughly balanced in 2023.
The IEA also estimates that the 13 OPEC countries have spare crude oil production capacity of about 2.75 million barrels per day, while the OPEC+ countries have spare capacity of 510,000 barrels per day.
So the decision to cut production by 2 million barrels per day is not as squeezed as the sensational headlines suggest.
The production cuts come against the backdrop of an already oversupplied market.
How much the price will rise is a guess at this stage, and any price hike will of course help Russia, which is facing a sizable cut in sales.
Whether we can interpret it as OPEC dumping the US and courting Russia as a new ally is propaganda territory.
In my opinion, this is more of a decision based on price ambition than some strategic geopolitical shift in major oil producers.
OPEC sees central bankers frantically trying to push their economies into recession as quickly as possible, knowing that in a state of (already) oversupplied, a recession will exacerbate the glut and push prices below the levels they want.
The purpose of cartels is to control prices to achieve income aspirations.
With the EU and US now colluding to set price caps, it has become a “cartel” (informal) on the demand side, not another cartel (OPEC) on the supply side.
Therefore, we should not be surprised by supply-side domination.
But if OPEC believes that the logic of high interest rates forcing them to act is accurate, then we have the beginning of a vicious circle:
Oil supply withdrawal -> higher oil prices -> higher inflation -> higher interest rates -> more supply withdrawal.
that’s it.
If it happened, it would be a very ugly short-term outcome.
But the IEA’s September oil market report tells us that many OPEC members are producing far short of their targets (and have excess capacity), so the decision to withdraw supply could have a fairly small impact on prices.
To some extent, it will depend on whether China abandons its (excellent) zero-corona strategy.
Right now, that’s keeping the oil demand side more subdued than it would otherwise be.
Overall, the current focus on energy has focused our attention on moving away from fossil fuels, which will be a great outcome over time.
In the short term, the inflationary impact of OPEC’s decision (and other sources – Covid, Ukraine war) – has so far triggered a mostly harsh contractionary fiscal and monetary policy response.
When I say a contractionary monetary policy response, I am referring to the prevailing logic that rising interest rates are anti-inflationary.
We know that there is evidence to support the opposite hypothesis.
But in this regard, one country stands out.
This is the country I am currently working and researching closely.
Fiscal and Monetary Policy Comparison
The graph below shows the change in fiscal balance as a percentage of GDP for selected developed countries and the euro area from 2013 to 2022.
The country names are in the order in which the current estimated fiscal balance lies (there isn’t enough room to align them with the relevant lines, but you can easily trace the lines relative to the countries).
Member states across the euro zone, dominated by Germany, have seen the least change during the pandemic, offering a level of financial support that differs considerably from the English-speaking West.
The U.K. and U.S. have been the most volatile during the pandemic, but have seen significant fiscal austerity since 2020.
Most prominent is Japan at the other end of the scale — its fiscal balance has not fluctuated as much during the pandemic as the U.S. and the U.K., but its fiscal support has so far remained at around 8% of GDP, unlike other countries.
Another standout in Japan was the Bank of Japan’s move to maintain its policy target rate of minus 0.1.
It also continued to buy large amounts of Japanese government bonds.
Consider the following facts:
1. Since December 2012 (when Abe took office), the Bank of Japan has purchased 165.9% of the total issued bonds.
That means it has bought all new issues and then some.
2. Since the start of the pandemic, the BOJ has bought 41% of the change in outstanding government debt, more or less maintaining its overall stake.
The chart below shows the government debt held by the Bank of Japan since 1990.
Japanese exceptionalism
Japan faces the same global supply pressures that are driving the current inflation impulse.
But while other countries are busy with fiscal austerity due to the erroneous need to “fix their budgets post-pandemic” and their central banks are raising interest rates frantically, Japan has remained calm on interest rates and has been particularly aggressive in using fiscal relief for ordinary Japan. Citizens’ cost-of-living pressures policy.
In other words, a world away from anywhere else.
I wrote this a few months ago- Why Japan has avoided rising inflation – a more united approach helps (July 4, 2022).
Wearing face masks responsibly in indoor settings, Prime Minister Mr Kishida announced in the new (210th) Parliament (Parliament) on Monday (3 October 2022) that the government would take what he called “unprecedented drastic measures” “Tackling inflationary pressures, including policies to reduce electricity bills for households and businesses.
What, fiscal tightening or forcing the BOJ to raise interest rates?
Quite the opposite.
The government will launch a series of fiscal spending measures this month.
You can find the full text of his speech here – Prime Minister Kishida’s Policy Address at the 210th Diet (Prime Minister Kishida’s policy speech at the 210th Diet).
PM told DIET (my translation):
1. “We will do our best to deal with the current high prices and revitalize the Japanese economy”.
2. “The world has been plagued by the coronavirus crisis, the energy and food crisis, and the climate crisis caused by global warming for the past two and a half years.”
3. “Japan has overcome the corona catastrophe and progress is being made in normalizing socioeconomic activities. However, Russia’s aggression in Ukraine, the surge in energy and food prices due to the devaluation of the yen, and fears of a global recession have become Japan’s The main risk factor for the economy.”
4. “Last month, we finalized additional measures to curb rising food and gasoline prices. We have put in place emergency support measures, especially for low-income households, which have a disproportionately high financial impact.”
5. “We will do everything we can to protect people’s lives and business activity from these high prices this month by developing comprehensive economic measures.”
6. “Measures have been taken to keep imported wheat prices … unchanged from October.”
7. “A major concern…is the risk of a sharp rise in electricity prices. We will take unprecedented drastic measures to directly reduce the rising cost of electricity for households and businesses.”
and more.
you understood.
He also spoke about managing wage growth within the public and private sectors to address the historical problem of low wage growth and investment to boost productivity and economic growth.
Compare this to what we hear from English-speaking leaders – “budget fix”, “getting rid of trillions of dollars in debt”, “fiscal rise until we stop inflation’ etc.
Light years apart.
You can also find documents related to these new measures on the Cabinet Office website – here (Published October 5, 2022, written in Japanese).
The Prime Minister stated:
Today, we discussed the development of comprehensive economic measures and the associated human investment and GX (green transition). In order to put the economic measures on the path of high growth, first of all, we will take all possible measures to support people who are struggling due to soaring prices. In addition, in order to achieve sustained wage growth that is not overwhelmed by price increases, we will strengthen support for skills transfer to growth fields and support for SMEs based on the October minimum wage hike. At the same time, under neo-capitalism, we will accelerate public investment as a driving force in priority areas to further expand private sector investment.
We’ve seen the Japanese government pay subsidies to gasoline wholesalers, which keeps gasoline prices much lower than otherwise.
While full details have not been released, it is likely that they will use the same approach with energy suppliers.
in conclusion
Currently living and working in Japan and seeing these policies shut down is very interesting.
From Australia, the RBA has been hurting the prospects of low-income homeowners and potential homeowners after promising no rate hikes until 2024 and hearing from the Treasurer every day on how we must tighten our belts and about us The national conversation about how things will be paid for, and Japan is like a breath of fresh air.
They talk about protecting citizens and doing everything possible to protect them from inflation using the currency issuance capabilities of the Japanese Ministry of Finance and the Bank of Japan (consolidated), and supply constraints will take time to resolve.
and startling differences.
Modern Monetary Theory (MMT) will tell you which approach will lead to better outcomes for the well-being of the people.
Enough for today!
(c) Copyright 2022 William Mitchell. all rights reserved.
