With Energy Prices Soaring, U.S. Recession Fears Grow

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Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--Against a backdrop of a higher-for-longer outlook for commodity prices and the additional geopolitical risk premium emanating from the war in Ukraine, the former head of Goldman Sachs Group, Incorporated (New York, New York) said there's a real possibility of economic recession in the United States.

U.S. real gross domestic product declined at an annual rate of 1.4% during the first quarter of the year, following an increase of 6.9% in the previous quarter. The federal government attributed the decline to steady pressures from the COVID-19 pandemic, as well as the tapering of the federal assistance that supported households during the worst of the global health crisis.

Simply put, households are having a harder time making ends meet. In the most recent reading of inflation, the federal government noted that consumer prices increased 8.3% over the 12-month period ending in May. Most of that increase is in the form of energy. The price for all energy commodities surged 30% during the period. For gasoline, prices are up nearly 44% and a staggering 80% for fuel oil.

For better or worse, meanwhile, it's cheaper to dine out than it is to buy groceries and cook at home. All told, that may be enough to deter any meaningful growth in the future as consumer spending accounts for the bulk of economic momentum in a capitalist system.

Former Goldman Sachs Chief Executive Officer Lloyd Blankfein told the CBS news show Face the Nation on Sunday that there was a "very, very high risk factor" for a recession in the U.S. If his assessment holds true, it would mark the first time for back-to-back recessions since the 70s and early 80s. Blankfein now serves as senior chairman of Goldman Sachs, after serving as chairman and chief executive until the end of 2018.

Inflationary readings, meanwhile, are at levels not seen since then. What triggered the recession in the early 1970s was the oil embargo imposed by Arab members of the Organization of the Petroleum Exporting Countries (OPEC) in retaliation for Western policies on Israel. In the 1980s, the Islamic Revolution in Iran led to global oil shortages that left the economy to stagnate.

Fast forward to the 21st century, the onset of the COVID-19 pandemic left scars on the global economy for obvious reasons. Social restrictions prohibited any real chance for economic growth. And when vaccines arrived, the resurgent demand pushed supply chains to the breaking point. Demand had already overwhelmed supplies.

By late 2021, there were already signs of economic woes ahead. At the start of the new year, inflation was running at about 7.5% for the 12-month period. The energy contribution to inflation was at 40%, and groceries were 7.4% more expensive than they were in January 2021.

At the time, most major economies were pushing for an energy transition away from fossil fuels. That caused investors to shift their focus on renewables, which OPEC leaders had said was a primary cause for energy-related inflation.

And then Russian military forces invaded Ukraine in an effort to restore what President Vladimir Putin saw as global influence that had deteriorated since the collapse of the Soviet Union. As a global leader in the production of everything from wheat to crude oil and natural gas, the near-universal pivot away from Russian goods in response to the invasion has further burdened the global economy.

U.S. crude oil prices were in the upper $90 range before the war and are now lingering at around $110 per barrel. U.S. retail gasoline prices, meanwhile, continue to set records. Monday set another at $4.48 per gallon, compared with $3.04 per gallon for the national average at this time last year. If consumers spend more money on fuels, they have less to spend on other things, undermining the prospect for any economic growth.

One more quarter of negative GDP in the U.S. economy means recession. Goldman Sachs tends to deal in the field of hyperbole. But the risks to future economic momentum are real.

"It's going to be quite difficult and oppressive," Blankfein said.

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