Analysis | The Finance 202: Attack on Saudi oil facilities should not hurt U.S. consumers -- too much

By Tory Newmyer

18-22 minutes - Source: The Washington Post

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THE TICKER

This satellite image shows damage to oil infrastructure from weekend drone attacks in Saudi Arabia. (Photo by HO / PLANET LABS INC. / AFP)

Fallout from the weekend attacks on two Saudi Arabian oil facilities rippled through markets Monday. Oil prices surged in one of their biggest rallies ever, and the major stock indexes dipped, breaking an eight-day run of higher closes.
But market analysts say the disruption to the world’s energy supply — the drone and missile attacks knocked out about half of Saudi Arabia’s oil production, or 6 percent of daily production globally — shouldn’t translate into economic pain at home in the form of sustained higher energy prices for businesses and consumers. 
That’s because if necessary, both Saudi Arabia and the United States could tap their strategic reserves, assuring they continue to meet demand for weeks. And the U.S. is hardly captive to foreign supplies, as it was during the 1970s oil shocks, since it has emerged over the last decade as the world’s largest oil producer.
Americans “are more insulated from dramatic swings because technological advances have increased domestic oil output and heightened efficiency, from automobile mileage to home heating,” my colleague Thomas Heath writes. “U.S. shale oil production has reduced domestic demand for oil from the Persian Gulf from 3 million barrels a day in 2003 to 1 million barrels. The U.S. economy is much less dependent on manufacturing than it was during the oil price spikes of the 1970s and ’80s.”
Investors appeared to draw reassurance Monday from short-term safety net that oil reserves can provide. “The Brent prices eased from an earlier spike of as much as 19.5% as traders took comfort from the stockpiles of oil world-wide that could be released to meet the demands of the global economy if the disruption in Saudi Arabia is prolonged,” per the Wall Street Journal’s Joe Wallace, Caitlin Ostroff and Amrith Ramkumar.
The event is sure to factor into Federal Reserve officials’ deliberations this week over whether and how deeply to keep trimming interest rates. The disruption could pressure central bankers to hold off on further cuts, as higher prices at the pump could translate into higher overall inflation. Bond traders see an approximately two-thirds chance that the Fed cuts its benchmark interest rate by a quarter-point this week, and a one-third chance it holds rates steady — up from the approximately one in five chance they assigned that possibility at the end of last week before the attacks, according to the CME Group’s FedWatch tool.
“While the push-through of inflation from oil prices to core prices is small, the jump in overall prices, in combination with signs that core inflation is already heating up, may make it more difficult for the Fed to cut rates further,” S&P Global’s Beth Ann Bovino wrote in a Monday note. “They had a cushion to fall back on with lower inflation — they could cut rates given inflation was low. Has the cushion been removed?”
Then again, if Fed policmakers see the event as contributing to wider uncertainty from the trade wars and slowing global growth, it could reinforce their impulse to cut.“Barring a more substantial geopolitical flare-up that leads to a sharp tightening of financial conditions, this move in oil should have only modest effects on the US economy,” Deutsche Bank’s chief U.S. economist Matthew Luzetti writes. “With the Fed worried about too-low inflation expectations and downside risks to the growth outlook, on balance these effects should reinforce the Fed’s already dovish bias.”
And if recent history is any guide, the impact on American consumers should be negligible. “The impact of changes in oil prices on the trend in inflation, as signaled by core measures, has been minuscule in recent years,” High Frequency Economics chief economist Jim O’Sullivan pointed out in a Monday note.
Via High Frequency Economics:


And while higher oil prices once translated into a undeniable drag on growth at home when the U.S. was more reliant on imports, the macroeconomic impact of higher prices is less clear now: It’s true that consumers face steeper prices; but the phenomenon also benefits domestic oil producers (and the stocks of major oil companies rallied Monday). A drop in the price of oil in 2015 and 2016 contributed to a mostly-ignored mini-recession that took a bite out of business investment and slowed growth.
But O’Sullivan doesn’t see higher prices contributing to what’s been sluggish business investment this year, because the increase won’t likely be enough to register.  “In any event, an $8-per-barrel change in prices is unlikely to have much impact on either consumer spending or business investment,” O’Sullivan writes. Goldman Sachs economist Jan Hatzius agrees, writing last night that "a deterioration in the growth impulse and a rise in the core inflation impulse would likely require much larger and more persistent oil price increases."
That said, if the attack sparks a wider confrontation between Saudi Arabia and Iran, all bets are off. "One of the biggest factors playing into our current economic outlook is uncertainty, and along with a heightened level of this, higher oil prices may be just one more nail in the coffin for this current US expansion,” Bovino writes. “As it is, we are already seeing businesses being reluctant to invest given the trade headwinds and this gives them more reason to hold off.”

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MARKET MOVERS

Federal Reserve chair Jerome Powell. (AP Photo/Manuel Balce Ceneta)

— Fed unlikely to signal its next moves. WSJ's Nick Timiraos: "It has lurched between escalation and detente in recent weeks. Trade isn’t the only geopolitical wild card: So are the risks from the U.K.’s coming departure from the European Union and an attack on a major Saudi Arabian oil processing hub that roiled global markets on Monday. Meantime, U.S. hiring and consumer spending haven’t lost significant momentum, suggesting domestic growth remains solid.
"So Fed officials are making policy decisions one meeting at a time—attempting to provide enough stimulus to keep the economy expanding without promising too much. Officials are also more divided over how to set policy with such an uncertain outlook."
TRUMP TRACKER
TRADE FLY-AROUND:

President Donald Trump and Japan's Prime Minister Shinzo Abe. (Carlos Barria/Reuters)

— Not so fast, Japan says; trade agreement isn't done yet: "[Trump] said his administration will enter into an initial trade accord over tariffs with Japan in the coming weeks while Tokyo warned any final deal must include assurances that Washington won’t slap new tariffs on $50 billion of Japanese auto exports," Bloomberg's Sarah McGregor and Jenny Leonard report.
"In a notice to Congress on Monday, Trump also said the U.S. will be entering an 'executive agreement' with Japan over digital trade. There was no mention by Trump if he’ll end the threat to impose tariffs on Japanese auto imports as part of the trade deal.  Japanese Foreign Minister Toshimitsu Motegi, the country’s point man for the trade talks with Washington, said Tokyo wanted to see the Trump administration lay to rest the threat of new auto tariffs before agreeing to a final trade deal."
— U.S.-China talks resume on Thursday: “Deputy-level U.S.-China trade talks are scheduled to start in Washington on Thursday, the U.S. Trade Representative’s office said on Monday, paving the way for high-level talks in October aimed at resolving a bitter trade war,” Reuters’s David Lawder reports.
“Earlier, U.S. Chamber of Commerce chief executive Tom Donohue said that U.S. Trade Representative Lighthizer told business executives that he was seeking a ‘real agreement’ that addresses intellectual property and technology transfer issues first raised by the USTR two years ago.”
— WTO hands U.S. win in Airbus dispute: “The World Trade Organization will grant the United States permission to impose tariffs on the European Union as part of a prolonged scuffle over subsidies given to European plane maker Airbus, European officials said Monday, a move that is likely to exacerbate trade tensions across the Atlantic,” the New York Times’s Ana Swanson and Milan Schreuer report.
“The ruling, to be published in the week of Sept. 30, is the global trade body’s final decision in a 15-year old dispute over the government assistance that Europe provides to its major plane manufacturer. It will clear the way for the United States to impose tariffs on European goods, worsening tensions that have become strained under [Trump’s] confrontational approach. The W.T.O. still must authorize a specific dollar amount that the United States can recoup through tariffs.”

That LeBron James jersey could get a little more expensive. Companies that make clothing and shoes for the National Basketball Association players are in the crosshairs of Trump's escalating trade war with China.
AP

The European Union’s order for Apple to pay $14 billion in back taxes to Ireland “defies reality and common sense,” the U.S. company said on Tuesday, as it launched a legal challenge against the 2016 ruling.
Reuters

TRUMP WATCH:

Trump arrives at a campaign rally in New Mexico on Monday night. (AP Photo/Evan Vucci)

— Manhattan DA joins fight for Trump’s tax returns: “State prosecutors in Manhattan have subpoenaed President Trump’s accounting firm to demand eight years of his personal and corporate tax returns, according to several people with knowledge of the matter,” the Times’s William K. Rashbaum and Ben Protess report.
“The subpoena was issued by the Manhattan district attorney’s office late last month, soon after it opened a criminal investigation into the role that the president and his family business played in hush-money payments made in the run-up to the election.”
Trump isn't the only White House figure whose personal holdings are facing scrutiny: 

• Transportation Secretary Elaine Chow is under House investigation for possible conflicts. From the NYT's Eric Lipton and MIchael Forsythe: "The House Oversight and Reform Committee asked [Chao] on Monday to turn over documents related to communication with her family’s shipping company as the panel stepped up an investigation into whether any actions taken by Ms. Chao amount to a conflict of interest. The request by the committee in the Democrat-controlled House relates to actions Ms. Chao has taken that potentially benefited Foremost Group, a New York-based shipping company owned by her family."
• Commerce Secretary Wilbur Ross still holds stake in a shipping fund he pledged to divest. Forbes's Dan Alexander: "Ross did not cut ties to a shipping fund he promised to divest, according to a new financial disclosure report obtained by Forbes. He still owns an interest in Starboard Recovery Associates LP worth $1,000 to $15,000. Under the liabilities section of the filing, Ross also lists a 'capital commitment' to a related company for $1 million to $5 million... In a public statement issued that night, Ross said he made accidental mistakes and promised bold action: 'To maintain the public trust,' he said, 'I have directed that all of my equity holdings be sold and the proceeds place in U.S. Treasury securities.'"

2020 WATCH: 

Democratic presidential candidate U.S. Sen. Elizabeth Warren addresses supporters at a rally at Washington Square Park on Monday. (AP Photo/Craig Ruttle)

— Elizabeth Warren draws huge NYC crowd. The Post's Annie Linskey, Amy B Wang and Cleve Wootson Jr.: "Sen. Elizabeth Warren hailed the political power of female-led organizing in a speech Monday night that invoked the deadly 1911 Triangle Shirtwaist Factory fire to argue that outrage can spark positive change — and to make the case for her own presidential ambitions.
"Warren has long faced doubts from some Democratic leaders and voters who wonder if she would be able to defeat President Trump, because of her outspoken liberal message and voters’ possible reluctance to embrace a woman as president. Monday’s speech, and the big crowd it attracted, was in part an attempt to rebut such doubts by arguing that liberal women have won big change before... At one point in her speech Monday, when Warren said the rich and powerful have 'gobbled up opportunity itself' but that 'we have the power to fix that,' the crowd interrupted with chants of 'Warren! Warren!'"

• Speech came hours after she rolled out anti-corruption plan. More from the Post team: "Among the nearly 100 suggested changes in the proposal, lobbyists would be banned from all campaign fundraising activities — including 'bundling' the contributions of other donors — and campaigns would not be able to receive 'intangible benefits,' such as opposition research, from foreign governments."

POCKET CHANGE

Amin Nasser, the chairman and CEO of the state-run oil giant Saudi Aramco. (Jon Gambrell/AP)

— Saudi oil attacks could jeopardize record-setting IPO: “An attack that knocked out half of Saudi Arabia’s oil production capacity has cast a shadow over state-owned oil giant Aramco and its long-awaited initial public offering, poised to be the largest in history,” CNBC’s Natasha Turak reports.
“Saudi Aramco CEO Amin Nasser told the media just last week that the mammoth company would list on the Riyadh stock exchange “very soon” as bankers from J.P. Morgan, Goldman Sachs, Credit Suisse and Citigroup met in Dubai to kick-start work on the gigantic offering. News of the weekend attack sent money streaming into safe haven assets Monday morning, and industry experts questioned the security of Aramco’s assets and the confidence of its future shareholders.”
— Strike could cost GM $100 million a day: “General Motors Co. stands to lose as much as $100 million a day if the nationwide strike of auto workers continues,” the WSJ’s Mike Colias reports.
“Auto-industry analysts estimate that the walkout — which began Monday and involves roughly 46,000 full-time workers in more than 30 factories across 10 states — could dent GM’s profit by between $50 million and $100 million daily. Stalled production could slash more than a tenth of GM’s expected third-quarter operating profit of about $3.5 billion by the weekend, although GM could make up some lost production once workers return, analysts say.”

• GM makes its most money in the U.S., but the strike comes at a critical time: “GM is seeking to recover lost market share in the lucrative pickup-truck category, with the continuing roll out of its most extensively redesigned pickups in two decades. The Detroit company is also confronting eroding profits in China, its largest market in terms of sales, and a stalled stock price.”

— Goldman’s chief risk officer becomes latest to leave: “Goldman Sachs Group Inc. Chief Risk Officer Robin Vince is leaving the firm, according to a person briefed on the matter, adding to a string of senior exits as Chief Executive Officer David Solomon reshapes his top team,” Bloomberg News’s Sridhar Natarajan reports.
“Almost a year after Solomon took over, he’s still moving executives around — and out. He’s placed several investment bankers into key roles in other divisions, including the trading business.”

The company’s parent has been trying to rescue the public offering amid concerns about the high valuation for a business that is deeply unprofitable.
NYT

Finding home insurance in wildfire-prone parts of California is getting more difficult and more expensive. No one can agree on how to make it any easier.
WSJ

The new chief of the Federal Aviation Administration says he plans to test out Boeing's software changes to the 737 Max in a simulator.
CNBC

MONEY ON THE HILL

The Capitol Dome. (Carolyn Kaster/AP)

— Democrats cave on stopping farm bailout: “House Democrats, amid a backlash from moderates, are backing away from a plan to block [Trump] from extending new farm bailout funds, people briefed on the discussions said,” my colleagues Erica Werner and Jeff Stein report.
The shift comes days after Democrats had sought to prevent the White House from expanding a major component of their farm bailout plan, which the White House has estimated could cost close to $30 billion. Trump had authorized the bailout funds in response to an outcry from farmers who claimed they were caught in the middle of his trade war with China. Democrats are likely to include legislation that would expedite payment of these funds as part of a must-pass spending bill as soon as this week.”
House panel probes private equity firms’ role in surprise billing: “The bipartisan leaders of the House Energy and Commerce Committee are launching an investigation into what role private equity firms may play in the problem of patients getting stuck with massive ‘surprise’ medical bills,” the Hill’s Peter Sullivan reports.
“‘We are concerned about the increasing role that private equity firms appear to be playing in physician staffing in our nation’s hospitals, and the potential impact these firms are having on our rising health care costs,’ [Reps. Frank Pallone (D-N.J.) and [Greg] Walden (R-Ore.) wrote in the letters to the private equity firms KKR, Blackstone Group, and Welsh, Carson, Anderson & Stowe.”
THE REGULATORS

John Wilson, with the New York Stock Exchange, monitors stock activity on Monday. (AP Photo/Mark Lennihan)

— Wall Street poised for big Volcker Rule win. Bloomberg's Jesse Hamilton: "Wall Street could soon get one of its most consequential wins of the Trump era as regulators are considering ripping up a rule that’s forced banks to set aside billions of dollars for swaps trades, according to people familiar with the matter. At issue is a requirement approved during the Obama administration that’s made lenders post tens of billions in margin when engaging in derivatives transactions with their own affiliates. Industry lobbyists have long argued that the demand, which came out of the 2010 Dodd-Frank Act, is redundant and puts U.S. banks at a competitive disadvantage to overseas rivals.
"Banks now appear poised to get their way. The Federal Deposit Insurance Corp. will hold a public meeting Tuesday to propose eliminating the margin requirement, said two people briefed on the plan. Other agencies, including the Federal Reserve and the Office of the Comptroller of the Currency, are also expected to recommend scrapping the rule, said the people who asked not to be named the proposal hasn’t been publicly disclosed."
THE FUNNIES
From The Post's Tom Toles:

BULL SESSION
Sen. Kamala Harris (D-Calif.) slow-jammed the news on NBC's "The Tonight Show with Jimmy Fallon":