The opening bombardment of Operation Epic Fury on February 28 succeeded in taking out the heart of the Iranian regime. But it also triggered extreme geopolitical instability in the Middle East and severed the aorta of the global economy.
The massive barrage of missile strikes, the chaotic swarm of counter-drone attacks, and the succession of Mojtaba Khamenei offer sensational headline material. Yet the real destruction, the kind that reshapes civilizations, isn’t happening in the smoky ruins of Tehran. It’s happening in the empty shipping lanes of the Strait of Hormuz.
Skyrocketing oil prices are a noted precursor to declining economic activity. Higher gas prices are not just an inconvenient market fluctuation. They act as a regressive tax on every single human being who eats, moves, or buys things. When the price of gas spikes and the pumps run dry, the very foundation of the global economy crumbles.
As of March 12, Californians are already paying $5.36 per gallon to fill up their cars. That may seem like a lot if you’re living elsewhere. In the south, for example, we’re paying $3.22 per gallon.
But according to the math of human survival, $5.36 per gallon is still the bargain of a lifetime. It’s a clearance sale on the very substance that built the modern world.
As the supply of oil is disrupted across the globe, we’re about to learn a painful lesson. That the modern economy has been living off an unearned inheritance of energy productivity. Without this liquid gold, the cost of everyday convenience, from overnight shipping to fresh fruits and vegetables in February and central air conditioning, would be utterly impossible.
Pistons vs. Perspiration
When the math of energy’s boiled down to its crystalline essence, a great disparity is discovered. Cheap, abundant petroleum has detached people from the physical reality of work. The actual costs to move a mountain or even a minivan have been obscured.
Splitting wood with an axe, for example, is much harder than using a gas-powered log splitter. Assuming a $20-an-hour labor wage, let’s look at the engineering reality.
A single gallon of gasoline contains roughly 33.7 kilowatt-hours (kWh) of energy. To put that in perspective, a healthy human being, working a grueling 8-hour shift of manual labor, produces about 0.6 kWh.
Do the math (33.7 divided by 0.6). One gallon of gas does the work of 56 days of back-breaking human labor.
If you pay a worker $20 an hour to do what that gallon of gas does, you aren’t paying $5.36. You are paying for 448 hours of labor. Thus, at $20 per hour of labor, the real value of a gallon of gas, in terms of human effort, is $8,960.
Even when accounting for the inefficiency of small internal combustion engines (at roughly 25 percent), that gallon is still doing the work of 112 hours of manual labor. That puts the fair price of gasoline, the price where human sweat is finally competitive with a piston, at $2,240 per gallon.
When you drive to Starbucks for your morning cup of coffee, you aren’t just burning fuel. You are burning the equivalent of a man working for two weeks straight to push your 4,000-pound SUV to the drive-thru window.
Over many decades, the precious utility of gasoline has been taken for granted. But the Strait of Hormuz is now closed. Soon enough, it will become very apparent how little can be accomplished without the aid of refined petroleum.
Approaching the Caloric Cliff
Yet the closure of the Strait doesn’t just mean you can’t afford to fill up your gas tank. It means the world can’t afford to eat. Energy and food are often thought of as two different cornerstones of civilization. But, in reality, they’re the same thing.
Impacts to the supply of oil and gas lead directly to impacts to the supply of fertilizer and food production. You can’t have an abundance of food brought to market when the tractor has no diesel and the soil has no nutrients.
About 30 percent of global nitrogen and phosphate fertilizer transits the Strait. What’s more, in the Northern Hemisphere’s it’s currently spring planting season. The most vulnerable moment in the calendar.
Natural gas doesn’t just heat homes. Rather, it’s the primary feedstock for urea. Without it, crop yields dramatically decline – often by half or more. By this, we are looking at a significant reduction in global grain carry-over (storage inventory) if this blockade lasts through April.
In addition, as the petrochemical industry halts, the miracle of the Green Revolution, which allowed 8 billion people to exist on a planet that naturally supports far fewer, disappears. The world population for most of human history was capped by the amount of nutrient rich soil, water, and sunlight that were available. That cap was busted through in the mid-20th century thanks to fossil fuels.
Without synthetic fertilizers, energy powered water conveyance pump stations, and diesel-powered tractors, the carrying capacity of planet earth drops by billions. The caloric math simply becomes too small a number to provide the sustenance everyone needs to live.
In short, the entire agricultural infrastructure is a mechanism for turning fossil fuels into calories. When the fuel stops, grocery store shelves go empty.
What’s the backup plan?
Running On Empty
Markets reacted favorably this week to the G7 and the International Energy Agency (IEA) proposals for a coordinated release from the Strategic Petroleum Reserve (SPR). Something on the order of 300 to 400 million barrels has been mentioned.
This is massive. Nearly double the emergency release of 2022. It makes good headlines. And helped ease the price of a barrel of WTI crude from $115 to below $90 for a day or two.
But, once again, the math reveals a great disparity. The Strait of Hormuz isn’t just a small spider vein. It’s the aorta main line artery. With it closed, the world is staring down a shortfall of roughly 20 million barrels per day (mbd).
If the G7 and IEA actually manages to dump 400 million barrels into the market, that historic intervention covers the gap for exactly 20 days. That’s it. Less than three weeks of breathing room.
And that’s assuming the logistics even work. You can’t just press a magic button and have 400 million barrels appear where it’s needed.
The maximum drawdown rate for the U.S. SPR is only about 4.4 mbd, and the rest of the G7 nations have even tighter bottlenecks. It’s physically impossible to pump the oil out of the reserves fast enough to replace what used to flow through the strait.
The SPR was designed for basic supply disruptions. A hurricane in the Gulf. Or a pipeline strike. It wasn’t built to subsidize a global blockade of the world’s energy aorta.
If Operation Epic Fury isn’t over in three weeks, the G7 will be running on empty. At that time, it will become lucidly clear what happens when over a century of energy abundance vanishes.
The impacts are both countless and extreme. For starters, the futile chickens of building cities in deserts, developing sprawling suburbs, and just in time delivery of food to market will come home to roost.
[Editor’s note: Get a free copy of an important special report called, “Cash Machine – Why You Should Own this Mineral Royalty with a 12% Yield,” when you join the Economic Prism mailing list today. If you want a special trial deal to check out MN Gordon’s Wealth Prism Letter, you can grab that here.]
Sincerely,
MN Gordon
for Economic Prism
