The top two headlines in today’s Wall Street Journal say it all:
The first one is “US Inflation Accelerated in August as Gasoline Prices Jumped”.
And the second explains that “Exploding Budget Deficits” are here to stay.
These are technically two different stories about to separate issues. But I’ll show you how they’re related, and how they point to the same conclusion: higher inflation is not going away.
The first story talks about the latest inflation numbers. No one who has visited a grocery store or gas pump over the past few months should be surprised– fuel prices are higher, and inflation has risen.
And ultimately this is a story about the rising cost of energy.
Remember that energy is one of the most important commodities in the world. Full stop. Every single activity in our modern world– driving to work, browsing the Internet, heating a home, manufacturing new iPhones, mining copper, farming soybeans, etc. requires energy in some form– gasoline, electricity, propane, etc.
And this means that cheap energy is critical to keeping inflation low.
Yet energy demand increases every year, for two key reasons:
First, there are obviously more people in the world each year. And rising global population means more energy demand.
Second, per-capita energy demand is also on the rise; in other words, the average individual around the world consumes more and more energy each year.
It’s pretty easy to understand why. In the US, for example, primary energy consumption is about 88.2 MWh per person per year. (A MegaWatt-hour, or Mwh, is a unit of measurement for energy).
That’s about 5x more than the global average, according to the US government’s Energy Information Administration.
So as lesser developed economies (like India) grow and become more advanced, their per-capita energy consumption rises dramatically.
And this is what’s actually happening; per-capita energy consumption rose more than 7% in India last year. In Indonesia it rose nearly 20%.
So global energy demand is clearly on the rise. And with very few exceptions, this trend has been very steady for the past several decades.
Energy supply, on the other hand, is a troubling story.
The #1 source of new energy supply growth over the past ~15 years has been shale oil in the United States. Shale created an American energy bonanza, propelling the US to triple its oil production in less than a decade and surpass Saudi Arabia as the #1 oil producer in the world. It’s all thanks to shale.
But those shale fields are quickly becoming depleted. This isn’t some crazy conspiracy theory or hidden secret– the shale oil CEOs have been very public about their peak production.
Given that US shale oil accounted for virtually ALL the growth in energy supply over the past ~15 years, the depletion of these shale fields means there could be quite a bit of stagnation in oil supply.
It doesn’t help that other major producers like Saudi Arabia have also reached peak production. Again, this isn’t a conspiracy theory; Saudi Arabia’s Crown Prince “MBS” stunned the world last year when he said that his country didn’t have the capacity to increase its oil output.
The result of these future supply and demand imbalances issues should be pretty clear: higher energy prices.
And, again, since energy is a major factor in nearly everything– food, fuel, manufacturing, etc., higher energy prices will cause higher inflation.
In theory this is an easily fixable problem. It’s not like energy companies don’t know how to explore, drill, and produce. And there are still places in the world (like Venezuela) that have vast, untapped oil reserves.
Unfortunately there’s an army of fanatics who are doing everything they can to block energy companies from producing more… including idiot protesters who literally glue themselves to the pavement or interrupt sporting events with glitter bombs.
The US government never misses an opportunity to frustrate and obstruct oil companies. They deny permits, they pass costly regulations, they impose punitive taxes, and they regularly demonize the industry.
Moreover, powerful investors like Larry Fink have forced banks and funds to deny much-needed capital to the energy sector, which reduces new discoveries and future production.
These same fanatics also willfully reject other obvious energy solutions like nuclear power, while clinging to the mythology that inefficient solar technology– which requires a 9-year old child in the Congo to mine cobalt with his bare hands in toxic conditions– will save the world.
Nothing goes up or down in a straight line, and gasoline prices will certainly go through periods where they rise and fall. But over the next several years, the current trajectory is pretty clear: energy will remain expensive. And that means higher inflation.
The second story in the Wall Street Journal this morning was about government spending.
And while there are some states in the US which routinely achieve exemplary fiscal results, politicians at the national level have absolutely no clue how to live within their means.
The federal budget deficit for Fiscal Year 2023 (which closes in 17 days on September 30th) will reach approximately $2 trillion. And as the Journal points out, there is no end in sight.
Annual spending on mandatory entitlement programs like Social Security and Medicare will reach a whopping $3 trillion over the next several years. And yet politicians from both parties insist that those programs will not be cut.
Simultaneously, gross interest on the debt could rise to $2 trillion annually within the next five years if interest rates remain at current levels.
This means that annual deficits will keep rising… and this is highly inflationary. Everyone alive has experienced first hand how excessive government spending over the past couple of years has contributed to a nasty, stubborn inflation problems.
But it’s even more important to understand that the US government NEEDS inflation to stay alive. At $33 trillion (and rising), the US national debt is simply too large at this point. And their only realistic option is to keep inflation in the 5-6% range, and repay the debt with increasingly worthless dollars.
These two points together– energy and government spending– paint a very clear picture of why inflation will likely remain higher for a long time.
And there are other forces as well which will contribute to higher inflation– geopolitical conflict, rising taxes, anti-capitalist “Bidenomics”, etc.
Again, these are all fixable problems. But the people in charge seem to have neither the competence nor desire to fix problems. They usually just make things worse.
Even when someone slaps them in the face with an obvious warning, they ignore it. When Fitch downgraded the US government’s credit rating last month, for example, the President and Treasury Secretary were genuinely bewildered; they found it incomprehensible that analysts wouldn’t have 100% confidence in their administration.
These people have a dangerous reality distortion field, and they’re clearly blind to the glaring dangers on the horizon.
Ever since I launched Sovereign Man back in 2009, I’ve been writing about the need to have a Plan B, just in case some of these risks come to fruition.
Yet when the risks are this obvious, and the people in charge so incompetent, it’s time to think about Plan B becoming Plan A.
Simon Black is an international investor, entrepreneur and permanent traveler. His daily letter is both educational and entertaining, and we suggest that those who want unbiased, actionable information about global opportunities sign up for Sovereign Man’s free, actionable newsletter at http://www.SovereignMan.com.
From Simon Black of SovereignMan.com
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