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Weekly Market Pulse: A Most Unusual Economy

The employment report released last Friday was better than expected but the response by bulls and bears alike was exactly as expected. Both found things…



The employment report released last Friday was better than expected but the response by bulls and bears alike was exactly as expected. Both found things in the report to support their preconceived notions about the state of the economy. I do think the bulls had the better case on this particular report but there have been plenty of others recently to support the ursine side of the aisle too. My take is that everything about the economy right now, and really since the onset of COVID, has been so unusual that anyone confidently predicting anything about how the economy will develop over the coming months is lying – to themselves or you or both. Any model or indicator or rule of thumb that has worked over the last few decades to predict the future course of the economy is suspect. No one alive today has any experience with a post pandemic economy, especially one with so much government intervention as this one. Comparisons to the 1918 flu economy are ridiculous.

The employment report was indeed better than expected, the gain of 372k jobs well in excess of expectations of 240k. The bulls were quick to point out that this means we aren’t in recession right now. It is true, obviously, that employment falls in recession. But it isn’t true that employment has to fall for us to be in recession. Of the 8 recessions since 1970, job growth persisted past the official onset of recession in 6 of them. Job growth in the current month does not in any way preclude recession conditions. Employment is a lagging indicator and sometimes it lags by months; the 1973/74 recession started in November 1973 and the first negative employment figure wasn’t until August 1974.

Note: I’ve truncated this chart and some others at January 2020 so the detail can be seen. The drop in employment in the COVID recession was so extreme that it distorts the chart.

The bears pointed to the Household report, from which the unemployment rate is calculated. In particular they cited a drop in the employment level of 315K. Unfortunately for them, this isn’t uncommon. As a recession indicator a drop in the employment level in the Household survey tells you exactly nothing:

Others cited a drop in the labor force as evidence of impending doom. I dare you to find a recession signal in this chart.

As I said above, I give the bulls a little more of the benefit of the doubt on this one because there was some data in the report that was less ambiguous in its meaning. For instance, nearly 42% of the unemployed are either new entrants or re-entrants to the workforce. Both are rising strongly which is not something we’d expect in or near recession. These figures tend to fall as we near recession:

Here’s another one: Part time for economic reasons, slack work or business conditions. It usually starts rising for months – sometimes over a year – before the onset of recession. In the 2008 recession, it hit its nadir in April 2006 while the recession didn’t start until December 2007. It is still falling:

I’ve also been reading a lot of commentary lately that classifies the current economy as “late cycle”, meaning that we are nearing – or already in – recession. They seemingly have good reason to make that distinction. In general, late cycle is said to be marked by a peak in growth with rising inflation and a tight labor market. That seems to describe the current economy pretty well. This part of the cycle also favors energy and utility stocks which just so happen to have outperformed this year. And yet, I can point to a number of indicators that look decidedly early cycle. C&I (commercial and industrial) loans have turned positive year over year:

Consumer loan growth is strong:

And banks are accumulating Treasuries and MBS at a slower rate:

I’d be remiss if I didn’t point out that this data is from May but if you want a more up to date figure, here’s total loans and leases in bank credit as of June 29th:

You don’t need to be an economist to see that, in the past, changes such as these have happened early in the business cycle. They are also all things we’d expect from Quantitative Tightening by the way and it may be that banks are just getting ahead of the Fed.

Okay, I’m sure you get the picture so I’ll stop with the charts for a while. This economy is different than anything we’ve ever seen and every prediction you read about it is just guessing. Which is what most economic punditry is all the time but it’s just more so right now. I have said many times that it isn’t our job to predict the future but rather to interpret the present as best we can. That is more true in this cycle than ever before and harder than ever as well.

I believe the economy is normalizing after all the distortions of the COVID era. The goods economy is slowing after being the only game in town for much of the COVID period. The services side of the economy continues to recover but is still below the pre-COVID trend. I think both will converge with their pre-COVID trends although both may overshoot initially. I know some will say that is wishful thinking but to me it’s just common sense. We were growing at 2.1% for the decade prior to COVID and we didn’t do anything to change that trajectory during the pandemic. It seems quite logical that growth would go back to where it was. Of course, logic often has little to do with the course of the economy since it is based on human behavior so I’m not making any big bets on that.

More important than either of those consumption trends though is the course of investment. It is investment that generally leads us into and out of recession. While there has been a lot of attention recently on the housing market because of rising mortgage rates. the more interesting part of investment is in nonresidential. Housing is certainly coming off the boil. Mortgage rates are all the way back up to where they were in the mid-00s but have pulled back from the 6.3% peak. Mortgage rates in the 5s is enough to cool things but as I’ve said about some other items, that was needed. Vacancy rates are at lows last seen in the early 80s and existing home inventory is still very low, about half the pre-COVID level. But real residential investment was flat from 2016 to 2020 and only in the post-COVID period has moved above that prior range. Residential investment hasn’t been the driver of the economy for quite some time.

Real nonresidential investment, on the other hand, has been rising and continues to do so. It was up 2.4% in Q1 and is at an all time high. One part of that rising investment is in manufacturing capacity in the US. The talk of returning some production home after the COVID supply shock has turned out to be more than just talk. According to Dodge Construction Network, manufacturing starts are up 116% on a 12 month rolling basis as of June. The Census Bureau has more subdued figures but still showed manufacturing construction up 26% year over year in May. This may not be de-globalization – and we shouldn’t want that – but it is a change in supply chains to add redundancy, to diversify to become more resilient. And part of that is bringing production closer to home, whether it be in Mexico or Arizona (Intel and TSM) or Buffalo (Ingersoll-Rand) or right here in my home state of South Carolina where Generac just opened a new plant about 25 miles from my house.

The long term impact of these changes, assuming they continue, is hard to judge just yet but more resilient looks a lot like less efficient so it likely means lower margins or higher prices in the long run. But in the short term, building factories shows up in investment and feeds directly into GDP growth. If that continues in the quarters ahead, it likely makes recession less likely. Figuring out where we are in the business cycle is hard in the best of times but it is particularly difficult right now when we are in the midst of a recovery like no other after a recession like no other. Could we actually be in the early part of this business cycle when seemingly everyone is looking for recession? Maybe, maybe not but I wouldn’t rule it out.

The rising dollar, rising rate environment continues. Interest rates rose last week after a string of better than expected economic reports. Factory orders, global services and composite PMIs, ISM non-manfacturing index, job openings, payrolls, wholesale inventories and consumer credit were all more positive than expected. By the way, remember all the fretting about the big March rise in consumer credit? It was cited repeatedly as evidence that consumers were running out of cash and resorting to credit cards to pay their bills. Cited without evidence I’d say. The May data was released last week and lo and behold, it was less than half the March figure. In fact, the monthly increase was less than 6 of the last 9 months. Why the big jump in March? My guess is tax payments but I don’t really know. Whatever the reason, the “crisis” appears to have passed.

The dollar hit a 20 year high last week, driven primarily by the Euro’s drop toward parity. I don’t think that should be particularly surprising given the continent’s precarious position with regard to Russian natural gas. That is my top worry right now with the pipeline being shut down this week for maintenance. There is a fear that it won’t come back on line after the maintenance period but I’m a little skeptical. Putin needs Europe’s cash as much as they need his gas. But we aren’t dealing with a rational customer in Putin so who knows? What I do know is that if he cuts them off completely, a recession is nearlyst assured. How bad would it get? I have no idea but I would say it doesn’t guarantee a US recession. I don’t know how many more blows the global economy can take though so it is the top of my worry list.


Note: The figures below are from the last 5 trading days.

Stocks and real estate were higher over the last week while commodities and bonds were down. International stocks were up as well but not as much as the US; not surprising given the surge in the dollar.

Growth stocks led the recovery but value stocks were up as well. Value still has a big lead YTD and over the last year and the trend is still in place. Are stocks out of the woods? I don’t know what the short term holds but unless we’re headed for a bad recession I think most of the damage is behind us. If you can look out 6 months to a year – and if you can’t you probably shouldn’t be in stocks – the returns will probably be quite positive if history is any guide.

Tech and cyclicals were the big winners last week with the communication sector also hot. Commodity related equities are still in correction mode but I think this will prove a buying opportunity in energy stocks (Warren Buffett apparently thinks so too). Despite what you may have read the drop in crude oil recently was not driven by demand concerns. Crude remains in steep backwardation (future months lower than spot) which indicates strong demand for crude now. It appears it was more technical and based on thin trading conditions than anything else. Still the uptrend this year has been incredibly steep and I expect the correction to continue down to the 80s.


There are only two items in the chart above that are flashing yellow on my economic dashboard. Credit spreads have widened recently but narrowed considerably last week. We’ve seen higher spreads in the past without recession and we’ve seen them around this level and been at the start of recession. By themselves, spreads are not sufficient to get us to change our portfolio. But they are a warning sign that we take seriously. The other indicator flashing yellow is the yield curve. The 10/2 curve is slightly inverted again but the 10/3 month spread is still over 100 basis points. The latter is at least as important as the former and so I take it as a warning but, like spreads, nothing that warrants any big changes.

The economy does not appear to me to be in recession right now. Are we on the verge of one? I don’t think so but another outside shock – like Russian cutting off Europe’s gas maybe – could easily push us there. Will that happen? I have no idea and no way of predicting that outcome with any degree of accuracy. So, I’ll stay conservative with a cash reserve and wait to see how things develop. No prediction, just observation. That’s as good as we can do in this most unusual of economic environments.

Joe Calhoun


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Zika Vaccine Targeting Nonstructural Viral Proteins Found Effective in Mice

UCLA scientists report positive preclinical results on the safety and efficacy of an RNA vaccine (ZVAX) against the mosquito borne Zika virus that severely…



Positive preclinical results on the safety and efficacy of an RNA vaccine (ZVAX) against the mosquito-borne Zika virus that severely compromises brain development in children of infected mothers, were published in the journal Microbiology Spectrum on September 28, 2022 “Replication-Deficient Zika Vector-Based Vaccine Provides Maternal and Fetal Protection in Mouse Model.” The investigators tested the vaccine in pregnant mice and report the vaccine prevents systemic Zika infection in both mothers and developing fetuses.

“The ongoing COVID-19 pandemic has shown us the power of a strong pandemic preparedness plan and clear communication about prevention methods—all culminating in the rapid rollout of safe and reliable vaccines,” said senior author of the study, Vaithilingaraja Arumugaswami, DVM, PhD, an associate professor of molecular and medical pharmacology at the University of California, Los Angeles (UCLA). “Our research is a crucial first step in developing an effective vaccination program that could curb the spread of Zika virus and prevent large-scale spread from occurring.”

Vaithilingaraja Arumugaswami, DVM, PhD, an associate professor of molecular and medical pharmacology at the University of California, Los Angeles (UCLA) is a co-senior author of the study.

Engineering the vaccine

The experimental vaccine is composed of RNA that encodes nonstructural proteins found within the pathogen that trigger an immune response against the virus.

Arumugaswami said, “Engineering the vaccine involved deleting the part of the Zika genome that codes for the viral shell. This modification both stimulates an immunogenic reaction and prevents the virus from replicating and spreading from cell to cell.”

Eliminating structural proteins that mutate rapidly to escape the immune system also ensures that the vaccine trains the recipient’s immune system to recognize viral elements that are less likely to alter. The researchers packaged the replication deficient Zika vaccine particles in human producer cells and verified antigen expression in vitro.

Nikhil Chakravarty, a co-author of the study and student at the UCLA Fielding School of Public Health
oversaw data analysis and writing of the manuscript.

“We deleted not just the gene responsible for encoding the capsid, but also those encoding the viral envelope and membrane. This vaccine is replication-deficient—it cannot spread among cells,” said co-author of the study, Nikhil Chakravarty, a master’s student at the UCLA Fielding School of Public Health.

Chakravarty clarified, “The deletion itself does not lead to stimulation of immune response but it makes this vaccine safer by rendering it replication deficient. The nonstructural proteins encoded by the RNA packaged in the vaccine stimulate more of a T-cell immune response that can specifically recognize Zika-infected cells and prevent viral replication and the spread of infection.”

The team showed increased effector T cell numbers in vaccinated versus unvaccinated mouse models. Using mass cytometry, the researchers showed high levels of splenic CD81 positive T cells and effector memory T cell responses and low levels of proinflammatory cell responses in vaccinated animals, suggesting that endogenous expression of the nonstructural viral proteins by the vaccine induced cellular immunity. There were no changes in antibody mediated humoral immunity in the vaccinated mice.

Co-author Gustavo Garcia, Jr., oversaw and conducted much of the experimentation reported in the study.

“We saw complete protective immunity against Zika virus in both pregnant and nonpregnant animals, speaking to the strength and utility of our vaccine candidate,” said Chakravarty. “This supports the deployment of this vaccine in pregnant mothers—the population, perhaps, most at need—upon further clinical evaluation. This would help mitigate some of the socioeconomic fallout from a potential Zika outbreak, as well as prevent neurological and developmental deficits in Zika-exposed children.”

The investigators administered the RNA vaccine using a prime-boost regimen where an initial dose was followed up by a booster dose. To estimate the durability of the vaccine, the researchers monitored the mice for a month-and-a-half, which is equivalent to approximately seven years in humans.

Chakravarty said, “Since the vaccine is geared toward stimulating T-cell response, we anticipate it will induce longer-lasting immunity than if it were just stimulating antibody immune response.”

Pandemic preparedness

The global Zika outbreak in 2016, led to efforts in developing effective therapies and vaccines against the virus. However, no vaccines or treatments have been approved for Zika virus yet.

“Other Zika vaccine candidates mainly focused on using structural proteins as immunogens, which preferably stimulates antibody response. Our candidate is unique in that it targets nonstructural proteins, which are more conserved across viral variants, and stimulate T-cell-mediated immunity,” said Chakravarty.

Epidemiological studies have shown that the Zika virus spreads approximately every seven years. Moreover, the habitats of Zika-spreading mosquitoes are increasing due to climate change, increasing the likelihood of human exposure to the virus.

“Given that RNA viruses—the category to which both Zika and the SARS family of viruses belong—are highly prone to evolving and mutating rapidly, there will likely be more outbreaks in the near future,” said Arumugaswami.

Kouki Morizono, MD, PhD, an associate professor of medicine at UCLA is a co-senior author of this study.

“It’s only a matter of time before we start seeing the virus spread again,” said Kouki Morizono, MD, PhD, an associate professor of medicine at UCLA and co-senior author of this study.

Before the vaccine candidate can be tested in humans, the researchers will be test it non-human primate models.

The post Zika Vaccine Targeting Nonstructural Viral Proteins Found Effective in Mice appeared first on GEN - Genetic Engineering and Biotechnology News.

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Butter, garage doors and SUVs: Why shortages remain common 2½ years into the pandemic

The bullwhip effect describes small changes in demand that become amplified as they move down the supply chain, resulting in shortages. The pandemic put…




Consumers have been seeing empty shelves throughout the pandemic. Diana Haronis/Moment

Shortages of basic goods still plague the U.S. economy – 2½ years after the pandemic’s onset turned global supply chains upside down.

Want a new car? You may have to wait as long as six months, depending on the model you order. Looking for a spicy condiment? Supplies of Sriracha hot sauce have been running dangerously low. And if you feed your cat or dog dry pet food, expect empty shelves or elevated prices.

These aren’t isolated products. Baby formula, wine and spirits, lawn chairs, garage doors, butter, cream cheese, breakfast cereal and many more items have also been facing shortages in the U.S. during 2022 – and popcorn and tomatoes are expected to be in short supply soon.

In fact, global supply chains have been under the most strain in at least a quarter-century, and have been pretty much ever since the COVID-19 pandemic began.

I have been immersed in supply chain management for over 35 years, both as a manager and consultant in the private sector and as an adjunct professor at Colorado State University - Global Campus.

While each product experiencing a shortage has its own story as to what went wrong, at the root of most is a concept people in my field call the “bullwhip effect.”

What is the ‘bullwhip effect’?

The term bullwhip effect was coined in 1961 by MIT computer scientist Jay Forrester in his seminal book “Industrial Dynamics.” It describes what happens when fluctuations in demand reverberate and amplify throughout the supply chain, leading to worsening problems and shortages.

Imagine the physics of cracking a whip. It starts with a small flick of the wrist, but the whip’s wave patterns grow exponentially in a chain reaction, leading to the tip, a snap – and a sharp pain for anyone on the receiving end.

The same thing can happen in supply chains when orders for a product from a retailer, say, go up or down by some amount and that gets amplified by wholesalers, distributors and raw material suppliers.

The onset of the COVID-19 pandemic, which led to lengthy lockdowns, massive unemployment and a whole host of other effects that messed up global supply chains, essentially supercharged the bullwhip’s snap.

How the bullwhip effect works.

Cars and chips

The supply of autos is one such example.

New as well as used vehicles have been in short supply throughout the pandemic, at times forcing consumers to wait as long as a year for the most popular models.

In early 2020, when the pandemic put most Americans in lockdown, carmakers began to anticipate a fall in demand, so they significantly scaled back production. This sent a signal to suppliers, especially of computer chips, that they would need to find different buyers for their products.

Computer chips aren’t one size fits all; they are designed differently depending on their end use. So chipmakers began making fewer chips intended for use in cars and trucks and more for computers and smart refrigerators.

So when demand for vehicles suddenly returned in early 2021, carmakers were unable to secure enough chips to ramp up production. Production last year was down about 13% from 2019 levels. Since then, chipmakers have began to produce more car-specific chips, and Congress even passed a law to beef up U.S. manufacturing of semiconductors. Some carmakers, such as Ford and General Motors, have decided to sell incomplete cars, without chips and the special features they power like touchscreens, to relieve delays.

But shortages remain. You could chalk this up to poor planning, but it’s also the bullwhip effect in action.

The bullwhip is everywhere

And this is a problem for a heck of a lot of goods and parts, especially if they, like semiconductors, come from Asia.

In fact, pretty much everything Americans get from Asia – about 40% of all U.S. imports – could be affected by the bullwhip effect.

Most of this stuff travels to the U.S. by container ships, the cheapest means of transportation. That means goods must typically spend a week or longer traversing the Pacific Ocean.

The bullwhip effect comes in when a disruption in the information flow from customer to supplier happens.

For example, let’s say a customer sees that an order of lawn chairs has not been delivered by the expected date, perhaps because of a minor transportation delay. So the customer complains to the retailer, which in turn orders more from the manufacturer. Manufacturers see orders increase and pass the orders on to the suppliers with a little added, just in case.

What started out as a delay in transportation now has become a major increase in orders all down the supply chain. Now the retailer gets delivery of all the products it overordered and reduces the next order to the factory, which reduces its order to suppliers, and so on.

Now try to visualize the bullwhip of orders going up and down at the suppliers’ end.

The pandemic caused all kinds of transportation disruptions – whether due to a lack of workers, problems at a port or something else – most of which triggered the bullwhip effect.

The end isn’t nigh

When will these problems end? The answer will likely disappoint you.

As the world continues to become more interconnected, a minor problem can become larger if information is not available. Even with the right information at the right time, life happens. A storm might cause a ship carrying new cars from Europe to be lost at sea. Having only a few sources of baby formula causes a shortage when a safety issue shuts down the largest producer. Russia invades Ukraine, and 10% of the world’s grain is held hostage.

The early effects of the pandemic in 2020 led to a sharp drop in demand, which rippled through supply chains and decreased production. A strong U.S. economy and consumers flush with coronavirus cash led to a surge in demand in 2021, and the system had a hard time catching up. Now the impact of soaring inflation and a looming recession will reverse that effect, leading to a glut of stuff and a drop in orders. And the cycle will repeat.

As best as I can tell, these disruptions will take many years to recover from. And as recent inflation reduces demand for goods, and consumers begin cutting back, the bullwhip will again work its way through the supply chain – and you’ll see more shortages as it does.

Michael Okrent does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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Why is Russia sending oil and gas workers to fight in Ukraine? It may signal more energy cutoffs ahead

Russian President Vladimir Putin has not hesitated to use energy as a weapon. An expert on global energy markets analyzes what could come next.




The new Baltic Pipe natural gas pipeline connects Norwegian natural gas fields in the North Sea with Denmark and Poland, offering an alternative to Russian gas. Sean Gallup/Getty Images

Russia’s effort to conscript 300,000 reservists to counter Ukraine’s military advances in Kharkiv has drawn a lot of attention from military and political analysts. But there’s also a potential energy angle.

In its call for reservists, Russia’s leadership specifically targeted oil and gas workers for the draft. One might assume that energy workers, who provide fuel and export revenue that Russia desperately needs, are too valuable to the war effort to be conscripted. But this surprising move follows escalating energy conflicts between Russia and Europe.

The explosions in September 2022 that damaged the Nord Stream 1 and 2 gas pipelines from Russia to Europe, and that may have been sabotage, are just the latest developments in this complex and unstable arena. As an analyst of global energy policy, I expect that more energy cutoffs could be in the cards – either directly ordered by the Kremlin to escalate economic pressure on European governments or as a result of new sabotage, or even because shortages of trained Russian manpower as a result of conscription lead to accidents or stoppages.

Dwindling natural gas flows

Russia has significantly reduced natural gas shipments to Europe in an effort to pressure European nations who are siding with Ukraine. In May 2022, the state-owned energy company Gazprom closed a key pipeline that runs through Belarus and Poland.

In June, the company reduced shipments to Germany via the Nord Stream 1 pipeline, which has a capacity of 170 million cubic meters per day, to only 40 million cubic meters per day. A few months later, Gazprom announced that Nord Stream 1 needed repairs and shut it down completely. Now U.S. and European leaders charge that Russia deliberately damaged the pipeline to further disrupt European energy supplies. The timing of the pipeline explosion coincided with the start up of a major new natural gas pipeline from Norway to Poland.

Russia has very limited alternative export infrastructure that can move Siberian natural gas to other customers, like China, so most of the gas it would normally be selling to Europe cannot be shifted to other markets. Natural gas wells in Siberia may need to be taken out of production, or shut in, in energy-speak, which could free up workers for conscription.

European dependence on Russian oil and gas evolved over decades. Now, reducing it is posing hard choices for EU countries.

Restricting Russian oil profits

Russia’s call-up of reservists also includes workers from companies specifically focused on oil. This has led some seasoned analysts to question whether supply disruptions might spread to oil, either by accident or on purpose.

One potential trigger is the Dec. 5, 2022, deadline for the start of phase six of European Union energy sanctions against Russia. Confusion about the package of restrictions and how they will relate to a cap on what buyers will pay for Russian crude oil has muted market volatility so far. But when the measures go into effect, they could initiate a new spike in oil prices.

Under this sanctions package, Europe will completely stop buying seaborne Russian crude oil. This step isn’t as damaging as it sounds, since many buyers in Europe have already shifted to alternative oil sources.

Before Russia invaded Ukraine, it exported roughly 1.4 million barrels per day of crude oil to Europe by sea, divided between Black Sea and Baltic routes. In recent months, European purchases have fallen below 1 million barrels per day. But Russia has actually been able to increase total flows from Black Sea and Baltic ports by redirecting crude oil exports to China, India and Turkey.

Russia has limited access to tankers, insurance and other services associated with moving oil by ship. Until recently, it acquired such services mainly from Europe. The change means that customers like China, India and Turkey have to transfer some of their purchases of Russian oil at sea from Russian-owned or chartered ships to ships sailing under other nations’ flags, whose services might not be covered by the European bans. This process is common and not always illegal, but often is used to evade sanctions by obscuring where shipments from Russia are ending up.

To compensate for this costly process, Russia is discounting its exports by US$40 per barrel. Observers generally assume that whatever Russian crude oil European buyers relinquish this winter will gradually find alternative outlets.

Where is Russian oil going?

The U.S. and its European allies aim to discourage this increased outflow of Russian crude by further limiting Moscow’s access to maritime services, such as tanker chartering, insurance and pilots licensed and trained to handle oil tankers, for any crude oil exports to third parties outside of the G-7 who pay rates above the U.S.-EU price cap. In my view, it will be relatively easy to game this policy and obscure how much Russia’s customers are paying.

On Sept. 9, 2022, the U.S. Treasury Department’s Office of Foreign Assets Control issued new guidance for the Dec. 5 sanctions regime. The policy aims to limit the revenue Russia can earn from its oil while keeping it flowing. It requires that unless buyers of Russian oil can certify that oil cargoes were bought for reduced prices, they will be barred from obtaining European maritime services.

However, this new strategy seems to be failing even before it begins. Denmark is still making Danish pilots available to move tankers through its precarious straits, which are a vital conduit for shipments of Russian crude and refined products. Russia has also found oil tankers that aren’t subject to European oversight to move over a third of the volume that it needs transported, and it will likely obtain more.

Traders have been getting around these sorts of oil sanctions for decades. Tricks of the trade include blending banned oil into other kinds of oil, turning off ship transponders to avoid detection of ship-to-ship transfers, falsifying documentation and delivering oil into and then later out of major storage hubs in remote parts of the globe. This explains why markets have been sanguine about the looming European sanctions deadline.

One fuel at a time

But Russian President Vladimir Putin may have other ideas. Putin has already threatened a larger oil cutoff if the G-7 tries to impose its price cap, warning that Europe will be “as frozen as a wolf’s tail,” referencing a Russian fairy tale.

U.S. officials are counting on the idea that Russia won’t want to damage its oil fields by turning off the taps, which in some cases might create long-term field pressurization problems. In my view, this is poor logic for multiple reasons, including Putin’s proclivity to sacrifice Russia’s economic future for geopolitical goals.

A woman walks past a billboard reading: Stop buying fossil fuels. End the war.
Stand With Ukraine campaign coordinator Svitlana Romanko demonstrates in front of the European Parliament on Sept. 27, 2022. Thierry Monasse/Getty Images

Russia managed to easily throttle back oil production when the COVID-19 pandemic destroyed world oil demand temporarily in 2020, and cutoffs of Russian natural gas exports to Europe have already greatly compromised Gazprom’s commercial future. Such actions show that commercial considerations are not a high priority in the Kremlin’s calculus.

How much oil would come off the market if Putin escalates his energy war? It’s an open question. Global oil demand has fallen sharply in recent months amid high prices and recessionary pressures. The potential loss of 1 million barrels per day of Russian crude oil shipments to Europe is unlikely to jack the price of oil back up the way it did initially in February 2022, when demand was still robust.

Speculators are betting that Putin will want to keep oil flowing to everyone else. China’s Russian crude imports surged as high as 2 million barrels per day following the Ukraine invasion, and India and Turkey are buying significant quantities.

Refined products like diesel fuel are due for further EU sanctions in February 2023. Russia supplies close to 40% of Europe’s diesel fuel at present, so that remains a significant economic lever.

The EU appears to know it must kick dependence on Russian energy completely, but its protected, one-product-at-a-time approach keeps Putin potentially in the driver’s seat. In the U.S., local diesel fuel prices are highly influenced by competition for seaborne cargoes from European buyers. So U.S. East Coast importers could also be in for a bumpy winter.

Amy Myers Jaffe does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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