Very Important Economic and Industry Updates

First, an update on wars. There is/was another cease fire at Hormuz to allow ongoing negotiations, as some oil gets through. Recent U.S. bombing has closed down Iran's main water export terminal at Kharg Island. In the meantime, threats are now impacting Red Sea oil movements, while Russian/Ukraine fighting continues with ever improving Ukraine weaponry aimed at Russian refineries causing serious domestic fuel shortages. Normally Russia has been a sizable exporter of diesel fuel, and now they are an importer. Our own strategic crude reserve is getting very low.  China’s reserve is the largest in the world, but is not easy to determine as they do not reveal their inventories.  The result is we have crude oil prices again at $100/barrel, with product equivalent values over $150/barrel.

Crude oil and refined product supply remains extremely tight, although gasoline supply has been helped by 'emergency' easing of RVP (Reid Vapor Pressure) environmental rules this summer allowing more blending of less expensive blendstocks and perhaps expanding volume. You might have noticed lower fuel efficiency from your gas vehicles, more than normal summer slippage.

Diesel fuel is in a much tighter balance especially because of solid demand for AI related economic expansion. It is unfortunate that fuel retailers are being blamed for the high prices at the pump. The reality is refining margins are at record highs mostly because a sizable amount of refining capacity has been temporarily taken out by bombing in the Middle East and Russia. I feel our oil industry has overall done an admirable job distributing the available supply as equitably as possible, helped by the free market system everywhere, but much more painful for foreign economies.

This situation continues to press interest rates higher as Central Banks everywhere worry about increasing inflation. In fact, the Federal Funds rate should actually be increasing by at least .5% based on the recent increase in the bellwether 2-year US Treasury rate, as the demand for money is strong with our AI economy plus the higher oil prices. Economies of the world will certainly be affected adversely, either way. Our housing industry is one example, automobiles perhaps next, and further declines in consumer spending.

Regarding AI updates, our huge ‘Mag 7 hyperscaler’ company earnings are reported this week and next when important news updates and progress will also be revealed. In the U.S., the important robotaxi race continues so far mostly between Waymo and Tesla with Uber and Lyft watching closely for driverless vehicle cost savings. Further progress will lead to quicker EV acceptance as well, but more testing for fully autonomous will be needed first.

Things are happening with AI development very quickly. Considering the huge capital costs for data centers, infrastructure, and energy, you can probably see why I have mentioned in the past that AI will accelerate a ‘Winners and Losers Environment’ in many, (or all?) industries, simply due to greater innovation and less costly systems to produce end products. Capitalism at work.

Jeff Kramer

jeff.kramer@nrc.com

(303) 619-0611