Are You Prepared for $200 per Barrel Oil?

Most days unfold with expected familiarity.  The sun rises.  The sun sets.  The hours in between flow from one routine to the next.

There are subtle, yet predictable changes.  The days are longer in the summer and shorter in the winter.  Apples are more abundant in fall than in spring.

But, for the most part, today is much like yesterday.  And tomorrow will generally be like today.  No better.  No worse.  In short, your morning cup of coffee will taste just as bold or bitter tomorrow as it did yesterday.

Yet every now and again we’re greeted with an astonishing surprise.  Something seemingly impossible happens.  There are days, no doubt, when the sky’s falling.

For example, the sky was falling on September 16, 2008, when Lehman Brothers vanished from the face of the earth.  That was the day black swans descended upon credit markets like common ravens upon fresh Southern California road kill.

Money market shares of the Reserve Primary Fund did the impossible.  They broke the buck.  Net asset value (NAV) fell to $0.97 cents a share.  Who anticipated that?

Hindsight, of course, is always 20/20.  Poor decisions one day lead to terrible consequences.  Nevertheless, cause and effect are not always observable from one day to the next.

You may get away with supersizing your meal on occasion.  But do it 30 days in a row and you’re asking for trouble.

Similarly, money market shares didn’t break the buck for no apparent reason.  Years of poor decisions and countless reckless decisions manifested to bring this seemingly impossible occurrence to pass.

What other disagreeable consequences may be lurking out there…

Breaking the Rock

When bad decisions stack up high enough, tomorrow’s destine to be worse in a radical way.  The seeds of awfulness will eventually bear poisonous fruit.

The U.S. national debt has officially eclipsed $30 trillion.  This didn’t happen overnight.  It took decades of wastrel government policies and can kicking to bring things to this awful place.

We anticipate that in the near future the consequences of a 50 year government debt gorge will manifest in wild, unexpected ways.  They already are.  Raging price inflation – declining money – is merely the beginning.

You see, the combination of declining money and an abundance of poor decisions can lead to places most people would rather not contemplate.  Nonetheless, oil prices merit some consideration.  Because there’s a very real possibility oil prices could soon rocket launch off the charts.

Where to begin?

If you recall, the sky was falling on April 20, 2020.  That was the day West Texas Intermediate (WTI) crude futures did the impossible.  The front-month May 2020 WTI crude contract dropped 306 percent for the session, to settle at negative $37.63 a barrel on the New York Mercantile Exchange.

“Oil prices not only hit rock bottom, but they also broke the rock,” remarked Bjornar Tonhaugen, head of oil markets at Rystad Energy.

No one foresaw the day when oil tankers would become paid floating storage.  Yet it happened, nonetheless.  Can you anticipate a tomorrow that will be far different than today?

In the case of oil, will tomorrow bring WTI crude at $200 per barrel?

Sounds crazy, we know.  Yet sometimes crazy things happen.  Let’s explore…

Are You Prepared for $200 per Barrel Oil?

The price of WTI crude is over $90 per barrel.  Perhaps, in the short term, this lofty price is attributed to tension with Russia over Ukraine.

But that’s not all.  An abundance of poor decisions have stacked up in a way that point to an extended period of higher oil prices.

The popular theme among politicians and the ruling elites is that crude oil will enter a secular price decline as global demand turns towards renewable energy.  What these eggheads don’t readily acknowledged is that such a transition takes time.  Demand for oil will decline much slower than available supply, especially when investment in production is curbed.

Who knows what President Biden and his cohorts thought would happen?  Maybe they thought by limiting new oil supply the transition to renewables would accelerate and that this would make the world a better place.

At the same time, woke environmental, social, and governance (ESG) investors and fund managers still think they are saving the world from the alleged bogeyman of global climate change.  In doing so, they’ve brought on the confirmed bogyman of higher oil prices, and all the knock-on price effects that brings.

Now what?

Remember, the solution to high oil prices…is high oil prices.  High prices motivates oil producers to generate more supply.  As supply increases, price decreases.

Yet politicians can’t just press a button and have new supply magically appear.

One of Biden’s first acts as President of the USA was halting new federal oil and gas leases by executive order on January 27, 2021.  On June 15, 2021, U.S. District Judge Terry A. Doughty blocked the order, clarifying that the authority to suspend oil and gas leasing lies “solely with Congress.”

After that, the Biden administration went bananas.  According to the Center for Biological Diversity, “The administration approved more than 3,500 oil and gas drilling permits in its first year, nearly 900 more than the Trump administration did in its first year.”

Unfortunately, Biden won’t get much support from OPEC and woke ESG investors.  As recently noted by Irina Slav, at OilPrice.com:

“A lot has been written recently about OPEC’s spare capacity and the not too rosy outlook for it.  That spare capacity is in decline for several reasons, but chief among them appears to be underinvestment.  As a result, JP Morgan earlier this month warned that Brent could rise to $125 per barrel as OPEC’s spare production capacity falls to 4 percent of total capacity by the fourth quarter of 2022.

“It is not just OPEC, however.  The biggest non-OPEC producer of oil—and biggest oil producer globally—is pumping less than it can.  Pressure from shareholders on public oil majors in the United States has increased, as has an insistence that companies focus on greening up their operations instead of looking for more oil and gas to extract.  As a result, the U.S. is pumping less oil than it could and, many would argue, should.”

Under this scenario, high prices may no longer be the solution to high prices.

What’s more, markets are prone to overshooting to both the upside and the downside.  By this, high oil prices could go much higher than what’s willingly fathomable.

Also consider that at this very moment, there’s an estimated 130,000 Russian troops mobilized on the Ukraine border.  Maybe Putin’s master plan is to have nothing more than a giant schoolyard stare down contest while scratching for a graceful – face saving – withdrawal.

But with that many troops concentrated along the border, what are the odds someone will have an itchy trigger finger?

Crazier things have happened.  And, hence, $200 per barrel oil may not be so crazy after all.

[Editor’s note: What if the hubbub with Russia over Ukraine is more than another great big nothing burger?  With clowns like Biden – and America’s insane foreign policy leaders – running point the prospects for something crazy happening are more likely than most people care to recognize.  Certainly, positioning some chips to exploit this scenario is a sensible move.  And paid up Wealth Prism Letter subscribers will discover exactly how in the February issue, due to be published in the early hours of February 7.  If you’d like to exploit this opportunity too, take action and subscribe today!  You can count your blessings later.]

Sincerely,

MN Gordon
for Economic Prism

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