Consumption, U.S. recession in 2020, oil-led, says prominent US economist

February 12, 2019 |

In Florida at the 24th National Ethanol Conference, US energy economist Phil Verleger said “I don’t see how we get through this in 2020 without a major recession,” referring to predictions of disruption in US and global energy markets created by belated response by the shipping and oil refining industries to changes in ultra-low sulphur requirements that will apply to marine fuels globally in 2020. The US has required ultra-low sulphur fuels for many years, but Verleger noted that the combination of spiked demand for USD diesel, and disruptions caused by US sanctions against Venezuela and Iran, can be expected to lead to ultra-low gasoline prices and ultra-high diesel prices. Verleger said that his model shows US gasoline retail prices dropping as low as $1 per gallon in 2020, while diesel could spike to $6.

“Bad management has transformed this once untouchable sector,” Verleger said, “in terms of investor support. Today, only institutionals buy stocks, and with the rise in 301ks instead of pensions they are less and less important. Investor disdain will limit the ability of companies to invest in new drilling. It has to come from internal cash flow, — they can’t issue more equity and are generally borrowed up to the hilt. This will limit the production of oil because there’s a shortage of capital except in the US, [and falling gasoline prices will limit the opportunities for funding from cash flows]. Wood McKenzie said there’s a need to spend $600 billion over the near term in new investment, but the industry will only have $400 billion or so.”

Verleger painted a grim prospect even for the US fracking industry, which has seen strong growth in recent years. Most of that independent production is by smaller independent producers, because they are small, they hedge. And with companies like Goldman Sachs essentially closing down their commodities desks, they are all looking for hedges and can’t get them. And, the rapid increase in US crude mostly produces a lot of gasoline and not much diesel. So, we’re looking at big gasoline surpluses, but supplies of ULS diesel could be tight.”

The impact could be substantive, says Verleger. “We don’t have enough immigration, and with diesel prices it is going to be very difficult to move things around the country in an affordable way, and farm income will be wiped out for the year.”

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