Tom Craig

How does demand destruction work? First, when oil prices spike, it acts like a tax on every household and business in the country. Americans collectively spend hundreds of billions of dollars more per year on gasoline and energy—and that’s money they’re not spending on other things. Economists call this the "purchasing power drain." But the damage doesn’t stop there. It triggers a chain reaction. Second, confidence falls. People see gas prices rising, hear bad news about the economy, and start to worry. They cut back on discretionary spending—dining out, travel, shopping. Historically, consumer confidence has dropped 20% to 30% within two to three months of every major oil shock. Then, big purchases freeze. Cars and homes are the most sensitive categories. When people are worried about the economy and paying more for gas, they put off buying a new vehicle or signing a mortgage. Hamilton (2009) showed that falling auto sales were a significant cause of the 2008 recession, separate from the financial crisis. Next, businesses feel the squeeze. Diesel above $5 per gallon raises the cost of shipping everything. Companies respond by delaying investments, freezing hiring and eventually cutting staff—especially in transportation, manufacturing and agriculture. Then the Fed gets involved. If oil-driven inflation forces the Federal Reserve to raise interest rates—or even just to hold them higher for longer—it makes borrowing more expensive for everyone, deepening the slowdown. But if the Fed does nothing, inflation could spiral. This is the classic stagflation dilemma, and there’s no clean answer. If the situation becomes more severe, the Fed will act. But we think more likely than not that the Fed remains patient and when it does act it will be behind the curve, adding further pressure on demand before cutting aggressively. Finally, if prices stay high long enough, people change their behavior permanently. They buy electric vehicles, lock in work-from-home arrangements, invest in energy efficiency. After the 1979 oil shock, U.S. oil consumption took nearly a decade to return to pre-crisis levels. This kind of demand destruction doesn’t reverse when prices come back down. On top of all this, the commodity channels—food prices rising because fertilizer is scarce, chip production slowing because helium is unavailable, industrial costs climbing because sulfur and natural gas are disrupted—add another layer of pressure that standard oil-GDP models completely miss. These channels also have the longest tail: Even after shipping through the Strait of Hormuz resumes, the physical damage to gas plants, refineries and fertilizer facilities takes months or years to repair.

MAERSK REMOVES PORT OF JEBEL ALI FROM PROTEA SERVICE DUE TO POLITICAL TENSIONS UNTIL FURTHER NOTICE.

The latest Economist cover says it all.

BREAKING: The US and Iran are discussing a potential deal that would involve a ceasefire in exchange for Iran reopening the Strait of Hormuz, per Axios. Details include: 1. China and Pakistan reportedly presented a peace initiative along those lines on Tuesday 2. Earlier today, Ian's Foreign Ministry called Trump's claims that Iran has requested a ceasefire to be "false and baseless." 3. US officials have cautioned that it was unclear whether a deal could be reached The nonstop headlines continue.

We just got this Force Majeure letter today from AirGas, our helium supplier (for our food science lab, where we have multiple mass-spec instruments that use helium). The letter says that helium supplies are cut off, and if you're lucky, you might be allotted HALF the helium you need. Even then, you will be charged extra for any helium you get. A LOT extra. So basically, every mass spec lab in America is about to go offline. AirGas is expressly invoking FM and saying they cannot meet their contractual obligations. Not their fault. Trump did this by attacking Iran. My lab is fine, of course, because I saw this coming and I ordered my lab staff to buy a one-year supply weeks ago. We already have it in place. So we're still up and running with plenty of helium. But very few lab science people are paying attention to the Strait of Hormuz, so they are getting blindsided by this. Trump's war is shutting down science labs all across the country right now. Don't dare call this "winning." It's a loss for America. And the world.