Iran Wars and Affordability Don’t Really Go Together
Friday’s jobs report just came in and it shows a significant decline. The US economy lost 92,000 jobs in February and unemployment rose. It’s always important to remember that these reports are quite noisy on a monthly basis and, especially recently, have undergone major revisions. That said, many of the political and economic comments from the past couple of months are based on other monthly reports that are ripe for stories but don’t necessarily tell us much. The political calculation is perhaps clearer than the economic calculation. The White House needs a good macroeconomic trend to come into its own relatively quickly. Because from an electoral point of view, it takes several months of favorable or at least “moving in the right direction” numbers for these changes to manifest in public attitudes.
What seems clearer is the situation in the Gulf. The Journal just reported that Kuwait has started reducing oil production in some of its oil fields. I mentioned earlier this week that oil was produced in a metaphorical pipeline (in addition to literal pipelines). If empty ships can’t be loaded with oil and the product can’t be shipped, it starts to back up in ports. And there’s not much room to store it. Very quickly, there is nowhere to put the oil. We must therefore begin to reduce the supply to ports from the oil fields. And it’s not as simple as turning a faucet on and off. There are time shifts to decrease and increase. If the situation in the Strait of Hormuz clarifies quickly or becomes demonstrably more secure, these supply chain issues can likely be resolved relatively quickly. But this seems very uncertain, and supplies are also falling in Saudi Arabia and the United Arab Emirates.
We don’t need to consider a major disruption in global oil supply or a major price shock, although neither scenario is crazy at this point. The relevant point is that even moderate upward pressures on oil and natural gas prices exert upward pressure on inflation, in the United States and globally. And that’s bad policy news for the White House, because they really need these prices to come down.
You have to emphasize the point that many commentators are making: regardless of security and international relations issues, starting a very hot war in the Middle East when your main goal is affordability and inflation is a very strange decision to make. And I still strongly suspect that Donald Trump went into this with little real appreciation of how these different parts of his presidency might collide, and with very little planning on the part of his team on how to deal with these very predictable challenges. A poor jobs report, which may well be just short-term noise, only adds to the electoral, if not necessarily economic, challenges.
