The Global Economy Is Running Out of Air - The Miracle Was Only Borrowed

For a while, the pessimists' math did not add up. The American and Israeli attacks on Iran in February triggered the biggest disruption to global energy flows ever recorded. Oil prices jumped, the war in the Middle East widened. Gas became scarce at filling stations, inflation picked up. The crash everyone expected never came. Most economies made it through, barely, but they made it through. The price of that calm just had not shown up in the books yet.

Now the room for maneuver is getting tight as the outlook darkens. A look at the past few days is enough. An attack forced Saudi Arabia to shut down one of its most important pipelines. The Houthi militia seized a strategically located island in the Red Sea along with a port city, which is likely to squeeze shipping even further. Talks among the Gulf states collapsed almost as soon as they were scheduled. Any one of those developments on its own would be manageable, together they are taking the air out of the situation. Oil shot toward $110 a barrel.

The bill is being paid in very different places. In the Philippines, fishing boats are staying in port because fuel is too expensive. In Bangladesh, power outages are shutting factories down for hours. In Guatemala, tires are burning in the streets. From Asia to Latin America, blackouts and rationing are piling up. Along with the anger of people who made none of the decisions and are paying for all of them.

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There is an uncomfortable reason things did not get worse. The most important one, says David L. Goldwyn, a former diplomat and U.S. Energy Department official, is that China cut its crude oil imports. The calm in global markets therefore depended on a decision in Beijing that nobody voted on. The world's largest oil importer stopped building inventories and started living off its own stockpiles. At the same time, the country held back exports of products such as kerosene and needed less crude itself. The United States also opened its emergency reserves. Japan and large parts of Europe did the same to slow the rise. Even Asia, which receives around 80 percent of the crude oil and liquefied natural gas coming out of the Middle East, still got its supplies. Something like that works for a while. Not for long.

Inventories across the 38 countries of the Organization for Economic Cooperation and Development are at their lowest level in decades, according to the U.S. Energy Information Administration. In the Gulf, alternative routes are shut down, including Saudi Arabia's East-West Pipeline. Goldwyn says prices between $80 and $100 a barrel should be expected through at least 2027. As oil gets more expensive, so does fertilizer, and with it food and freight. Inventories are low, and there is no sign the straits are reopening, says Neil Shearing, chief economist at Capital Economics. Higher inflation is the result. The Asian Development Bank expects inflation in the region to rise from 3.0 to 5.2 percent. In Europe and the United States, it will stay between 3.5 and 4 percent until at least the middle of next year, and Britain will be no different, Shearing says.

Fear of rising prices is pushing central banks to raise interest rates. Every increase meant to rein in prices also hits demand, which is barely breathing as it is. Credit gets more expensive, the economy slows. For Germany, already on the edge of recession, it is a blow at exactly the wrong time. Refineries are reaching their limit. The buffers are melting away, the International Energy Agency warned last week, and the refining system is stretched to the breaking point. Ukrainian attacks on Russian refineries are making things worse; their capacity is expected to fall by a little over 30 percent over the next 18 months, according to the agency. What goes offline in one place is missing everywhere else. Russia extended its diesel export ban through the end of the month.

The jump in diesel prices prompted President Trump to blame Ukraine and urge it to spare Russian refineries. Goldwyn fears rising prices could push the president to impose a diesel export ban before the November midterms. At home, the price would fall for a moment. But without foreign buyers, refineries would cut production, and the shortage would grow worldwide. Latin America, which buys a lot of American diesel, would be hit especially hard.

No corner of the world is being spared. The Gulf states are still carrying the costs of the war against Iran. The region that produces the raw material is among the first to be hit by its price. Qatar's economy, which depends on liquefied natural gas, is expected to shrink by 8.6 percent this year, according to the International Monetary Fund. Saudi Arabia's output in the 2nd quarter was 4.8 percent below the level a year earlier. As always, the poorest are taking the hardest blows. Africa depends on imported energy and imported fertilizer. When they get more expensive, yields fall and the price of bread rises. What appears on trading screens as a number becomes a meager harvest in the fields and a smaller meal at the table. Asia escaped the feared shortages, but paid far more for its supplies.

It does not stop with oil. Tariffs add costs to what consumers buy and what manufacturers need. The World Food Programme warned last month that El Niño weather patterns could push around 50 million people into acute hunger. Government deficits are at record levels. Japan and Indonesia spent billions on fuel subsidies so prices would not crush their citizens. In bond markets, fears are growing that debts may no longer be manageable. Government creditors are demanding a premium for that risk, and they are getting it. In Japan, yields on 10-year government bonds reached their highest level in 3 decades this month.