I want to start off by talking once again about an economist who hallucinates more than AI. Her logic board seems to have fried because every point she makes counters her own argument. I came across an article on Oilprice.com that claimed the oil supply crunch from the Iran war could take crude prices down to $40/bbl! It’s been two decades since we saw prices that low, and we have certainly never seen such low prices due to an oil shortage. We have, however, seen prices that low cause oil producers to reduce supply because it wasn’t worth producing anymore.
You would think, if you were going to make a claim that is peculiar at best, you’d be armed with some careful facts and logic. I read the article to find out how on earth the writer came to the conclusion that a supply crunch would crush prices, and to such a low level. I wondered what on earth I was missing in my own predictions that run the opposite direction. I found out what I was missing was the drugs she’s apparently taking. She starts off reasonably enough:
There have recently been many warnings about near-term oil shortages stemming from the conflict in Iran. Most analysts assume that shortages mean higher prices.
Except that she starts off with that in order to say that this one reasonable statement is unreasonable. Most of us understand this dynamic intuitively. We call it “supply and demand.” Run low on things, people will bid up the price to get the scarce item. Yet, somehow the oil addled brain that wrote that piece thinks a shortage of the most critical commodity for the global economy to function is going to result in prices plunging. Well, in the new world of “alternative facts,” who knows?
Big claims require big proofs, though, so I read on:
As I will explain, the dynamics of a self-organizing economy suggest the opposite outcome — lower prices, deepening recession, and shortages of goods and services that have little to do with price.
There is a formula buried within that statement, which I’ve said we may eventually see, but clearly shortages of goods and services do not lead to an outcome of lower prices UNLESS AND UNTIL they lead to an outcome of recession. Recessions do almost always lower some prices. So, stay in recession long enough and go deep enough, and prices could fall, but that is way down the road.
In forecasting stagflation—the combination of a stagnant or even receding economy with rising prices—I’ve said the present unfolding economic collapse may take us into a depression that ultimately could lower prices by destroying the economy so badly no one can afford to buy anything; but that all starts with inflation getting so bad it crushes the life out of the economy.
Now, the point here isn’t to take down what the writer on Oilprice.com said, but to use it to show in yet another way why things are not going to go that way and how they will go. With that in mind, we get to her breakdown of the dynamics, which disproves itself as it goes:
Rather than high prices, my major concerns are recession and the disappearing availability of goods and services that we rely on. This might be similar to the empty shelves that many stores experienced in 2020 and 2021. There may also be new government restrictions, intended to work around the reduced oil supply in a way that will allow essential services to continue to operate normally. Oil prices are likely to fall below $40 per barrel, as they did in 2020 with Covid restrictions.
The recession that is coming will be partly due to tariffs, which raise prices. That cuts back commerce and can cause a recession; but that recession doesn’t remove the tariffs that get built into prices; so, you likely remain stuck with those. Profit margins have already been cut to extremes to avoid passing on the tariffs as much as possible, so they won’t get cut back more. People may stop buying, then the lack of demand can reduce prices, but that happens after the economic wreckage, and there are other dynamics here that make that unlikely for awhile, too.
The major factor causing a deep recession/depression is going to be the energy crisis. I can’t think of any situation where a shortage of fuel has caused fuel prices to fall. Prices plunged very briefly during Covid, but not due to shortages. It was because no one was driving for a short time. Eventually, high prices during fuel shortage may cause fuel demand to fall; and that can cause prices to stop rising further or maybe to fall eventually if demand drops off enough; but that still mandates that, first of all, you have to endure the shortages that drive up prices enough to change purchasing behavior.
As prices go higher and higher, people start economizing; so, yes, that kind of recession may eventually have a self-correcting mechanism through pricing; but that is after you are deep enough into the pain to force people to change their consumption. And then it is far from a given.
Let’s look to the authors own example, which is where her argument disproves itself. She says it might play out similar to the empty shelves seen in 2020 and 2021. Yes, it will. First, we see it play out in empty gas stations here and there. Then we’ll see some products that depend on petroleum for their ingredients, such as plastics, become shorter in supply. That will drive prices UP, not down. Look at what happened in 2020 and 2021 when shortages were forced because production was forced by the Trump government to shutdown:
US Inflation Calculator
There was a brief drop in 2020, but it wasn’t because there was a shortage in products. It was because, for a while, many businesses were forced to close, so it was harder to buy anything, and then businesses were restricted in occupancy. That is essentially choking off demand; but look at what happened for years afterward. Inflation skyrocketed for two years and then took many more years to … never get back to where it was! It was hardly a story of disinflation, compared to where we had been before that event. The shortages plus the government bailouts led to massive inflation.
That situation was so much different than an energy crisis, however, and the author is talking about both the prices of goods and services and the price of crude oil. To see how an energy crisis works, we have an exact example to look at that came out of this same region. Right now, Iran is cutting off oil intentionally. Back then, all of OPEC joined in on a scheme to cut off oil intentionally. The result was far higher increases in the price of oil and in general inflation than we have seen because it went on a lot longer than the situation has so far.
It was different in one key way that makes this situation worse. There was no damage to oil infrastructure in the Middle East back then, so things could be started right back up once the nations of the region had achieved what they wanted. We have to rebuild infrastructure after the war ends, whenever that is. And Kuwait has told us that it will take three months after the strait is reopened to get oil production restored.
Kuwait Petroleum Company expects it will take considerably longer to restore oil production than many traders appear to assume if the Strait of Hormuz reopens in the coming days.
Other nations took a lot more damage, so the timeline will stretch longer.
On June 17, President Trump said, “We will run out of reserves in about four weeks without a deal.” According to the article, we are not certain whether Trump intended to apply this statement to US or world emergency reserves.
Also, according to this recent video, the US’s largest tank farm seems to be very close to the minimum level at which crude oil can be withdrawn from its tanks. And, on June 23, MSN said, “America may see actual gasoline shortages by July 4.”
The already-pumped oil in storage is intended to be used as a buffer if there are variations in supply or demand. The reason that these buffers are falling low is because considerable oil from them has already been used to mitigate the shortfall in crude oil supply to date.
All of which will raise the price of oil and finished fuel. The more those shortages emerge, the more desperate people and businesses will be to get their hands on this essential commodity.
The shortfall in the supply of crude oil supply cannot be expected to disappear quickly. There has been considerable damage to infrastructure in Iran and elsewhere. It will take years rather than months for this to be repaired. In countries where oil production has been shut in, some wells are likely to produce less after being reopened following many months of closure. Furthermore, Iran has no incentive to completely reopen the shipping lanes, since keeping them potentially closed has the potential to raise oil prices per barrel. Higher oil prices would help the finances of Iran.
Everything she says here runs counter to her argument, and says the shortages will be here for a while. Eventually, they may drive prices up enough to force change on people’s consumption, and that will slow our moribund economy even more, and MAY eventually start to bring prices down due to lack of demand, but that will be quite a ways down the road if it happens.
[2] Perhaps because of concern about low buffer supplies, the US has negotiated a deal with Iran that seems unfavorable to the US.
Information keeps coming out that indicates that Trump’s current Memorandum of Understanding (MOU) is very favorable to Iran. It looks as if the MOU has been written as if Iran won the war. We are also seeing that other countries have begun acting as if Iran has indeed won the war. For example, on June 23, a joint statement was issued by Iran and Oman. The two countries seem to be co-operating in setting up the collection of funds from ships passing through the strait to cover insurance and other costs.
Which, if it happens, will also push the price of oil up higher because those fees will be added to the cost of the oil delivered and pass through the pricing of fuels, lubricants and plastics, etc.
[3] Trump or another leader cannot restart the war against Iran and expect to do any better.
A major problem is that the US has substantially depleted its ammunition supplies, and it will take years to replenish them. While the US could perhaps launch a short attack, it would not be able to carry out a sustained campaign for very long.
That may well be true, but other headlines show how he is already planning for a full-scale war if necessary, the idea that the war is over is far from certain. I’m sure he very much doesn’t want to, but Iran would love to cripple the US as much as possible, and time is on their side to such extent that, the more time things stall, the more crippling of America Iran accomplishes.
Then the author defaults back to this:
Based on their models, economists typically reach the conclusion that inadequate oil supplies will lead to high oil prices. It is likely that President Trump and his advisors believed that inadequate oil supply would lead to high oil prices.
Some analysts, including me, would argue that the models of economists are very inadequate; they give misleading indications by leaving out the complex self-organizing nature of the economy.
Historic examples
Again, look at her own example from 2020-21 where an economy that could be started back up overnight because it was shut off by decree left years of inflation in its wake. Of course, that was fueled by the Fed and Treasury doling out lots of money into those shortages, empowering people to bid up prices on reduced supplies. However, look at the 70s embargo, when the government did not do that, and you see prices went up even worse, especially on the cost of crude and of fuel but also the cost of everything.
That is when the word “stagflation” was coined. The shortages remained because they were forced by a political shutdown, and the shortages, in that case, kept prices rising far above the Fed’s target rate of inflation for years, even as the Fed did the opposite of the Covid stimulus and did all it could to raise interest rates and limit money supply in order to curb inflation. They could still hardly kill it. Thinking they had gone far enough and caused enough economic wreckage at one point, they backed away from the battle, and prices immediately soared to an even higher rate of inflation. They had to strangle the economy half to death after that to get prices to come back down and stay down.
Higher oil prices are sometimes desirable because they encourage more oil extraction. For example, higher prices allow marginal wells to continue to be profitable longer. They can also make a new, higher-cost source, such as tight oil from shale, attractive for drilling. Looking ahead, higher oil prices would make it easier to get oil company support for ramping up oil production in Venezuela.
Higher prices do all of that, but that runs counter to her argument, too, because prices have to get higher first and then stay up for a couple of years to drive oil production and refinery capacity up enough to increase production to where there is so much supply. After all of that happens, which takes time to build out, we could have a glut and see prices finally fall to $40/bbl. By the time that happens, however, massive damage is already in place. So, it is only relevant for the distant future as a corrective to crude oil prices or the prices of goods and services.
Yeah, we get it. Prices rise and fall and that impacts oil production every time. That still includes “prices rise.” Not for three months, but for several years as her own graph shows. Production slowly ramps up to capture more of those higher prices, and the economy enters a correction that eventually brings prices back down, and then oil production slows. It’s always in flux.
However, even that is not an argument to say we’re going back to $40 crude. You can see the last cycle we went back to stopped at about $60 crude. That point only arrived after a decade of sky-high prices, and that was without any serious damage to oil infrastructure. So, it is not likely that we’ll get back to even $60/bbl for longer than a speculative reflexive action because Iran plans to keep causing trouble—if not with war, then with fees—and because of all the damage and the need to replenish exhausted reserves. Replenishing the SPR does as much to push crude oil prices up as utilizing the reserve did to help hold crude prices down.
So, yes, there are corrective dynamics in the economy and in oil markets, but they work by causing extreme price pain long enough to get production to rise and demand to fall until a new equilibrium is restored. That, as you can see in her own graph, can take as long as TEN YEARS. The only way we get down to $40 oil is for prices to cause extreme pain and economic crippling for even longer than the last period of high prices on her chart, which still did not get us down to that price level, even though it resulted in enormous production increases, as she shows in another chart:
Fracking eventually got us there, but crude prices average around $75 per barrel ever since. So good luck with hitting $40 for any more than a flash crash.
[5] Oil prices since the war started on February 28 have not bounced very high. Recently, they have tended to fall back, close to their pre-war level.
Even I, who have been predicting high oil prices, said they would fall back quickly when the strait reopened. It’s reopened enough for speculators to believe it is happening. But I also said that will just be a reflexive action that won’t hold BECAUSE of those serious shortages that will start to appear when the SPR runs dry and other tank farms start running dry, which now is only about three weeks away. From there, actual shortages, not just fears of shortages, will drive prices back up. So far, we haven’t experienced actual shortages because we started with an overabundance of reserves. Those are now almost exhausted.
Second, there is a lag issue regarding how soon the impact of missing supply actually hits the market. The slow transit time of oil from the Middle East to markets means that the actual disruption of supplies did not hit until at least 50 days later. If crude oil first needs to be processed by local refineries and then the oil products shipped to customers, the lag would be even greater–75 or 100 days in total. Thus, much of the price increase to date may be based on a fear of shortages, rather than on an actual shortage issue.
EXACTLY! Thanks for reinforcing my point that we have not begun to feel the REAL pain yet because, even beyond that lag time, our crude oil reserves have buffered the shortages of delivered crude until now. Cushing is effectively dry, and when the SPR gets there, reality sets in, and that may include plenty of fear, too, but more importantly, it includes actual shortages in refineries and ultimately at gas stations that the refineries cannot fully resupply.
Ukraine has been targeting some of the oil infrastructure of Russia, leading to reduced gasoline and diesel availability within that country. All these issues have tended to reduce the demand for oil. The lower demand acts to hold down oil prices.
No, they reduced supply of oil inside Russia, which is resulting in reduced supply of Russian oil as a replacement for ME oil. Demand, as in desire and need to buy has not really throttled down. It is simply force to hold back because you cannot buy what is not there. So, you find ways to live with that. That demand pressure based on needs and wants is still there, more intense than ever, but you cannot measure it in volume because there is no volume to sell. Eventually, those ways may become more permanent measures that can have longterm effects; but, for now, it is simply that you cannot buy what does not exist.
What this actually means is supply is crippled even further because Russian alternative supply is being seriously knocked out.
A fourth issue has to do with worldwide economic conditions before February 28. Even before the war, much of the world was in close to a recessionary situation. There were very many low wage earners who could not afford much beyond the basic necessities of life. Even a small run-up in oil prices tends to affect food prices because oil is often used in farming operations and food is usually transported to market using oil. With higher food prices, poor consumers were forced to cut back on other purchases. This recessionary dynamic can be expected to get worse if oil prices inch up even a bit.
It certainly will, but look at how long it took in the seventies and how much intense quashing via sky-high interest rates by the Federal Reserve it took to get prices back down. It took eight years of intense inflation fighting via very high Fed target interest rates (higher than we have ever seen since then) to get prices back below $80/bbl.
And here is where I think she might have overdosed on the hopium:
I expect that oil prices will continue to remain relatively low, or they will only briefly rise to high ($150+) levels, even if there are actual oil supply disruptions.
I expect that the dynamics we have been seeing since February 28 will continue, and may intensify. Governments will add new restrictions that will reduce oil use. Airlines will go bankrupt, or they will reduce flight schedules. Recession will become even more of a problem. These issues will tend to reduce usage without raising prices.
The dynamics before February 28 were the stealth recession. We’re still in it, and it is getting worse, so I agree with her description of economic collapse; but stagflation from an energy crisis causes prices to remain high, even in recession, due to significant forced shortages. Her critical mistake is to think that all recessions are disinflationary. So, in her limited thinking, if we plunge into a bad recession, prices will fall. The recession the seventies certainly was not disinflationary, and it was a bad one.
You have to get a lot higher than $60/bbl to cause enough economic damage to stuff prices back down. In fact, $60/bbl is cheap, so it doesn’t bring prices down. As they say, the ultimate cure for inflation is more inflation. Prices get high enough, and they practically crush the economy out of existence. Then the pendulum swings the other way. If oil prices stay down like she describes then none of the correctives she describes, such as increased oil production, even happen. At $40/bbl oil, production has typically decreased because it isn’t profitable. With major reserves to completely refill, that isn’t going to happen. So, she must be smoking the same wild-wood weed that I said Jeremy Siegel was smoking several days ago.
7] What we may see more of is broken supply chains.
There will be more signs in grocery stores and in home product stores saying, “This product is temporarily unavailable.” Car repair shops may tell us that a required replacement part will not be available for several months. Physicians may tell us that a medicine or chemotherapy drug that they normally use is, at this time, unavailable.
Yes, we will likely see all of that, but that feeds my argument, not hers. The price of an apple doesn’t rise to $10, even if the Fed rapidly “prints money,” because there are lots of other apples competing. Only when we get down to the last few apples will anyone pay $10 to get one if they have lots of money to make that price easy to pay. People aren’t dumb enough to pay more when plenty of vendors are willing to sell for a lot less. But when shortages set in, then competition among buyers gets hot. So you need the same formula I wrote about all the time during the Covidcrash, which enabled me to say the Fed was nuts about “transitory” inflation—too much money chasing too few goods. When you have both of those, you see inflation skyrocket, which was what we eventually saw.
[8] The operation of the economy depends on an adequate supply of many kinds of energy. If oil supply is reduced, an economy needs to shrink to a smaller size to match. This is what leads to recession.
It does; but, again, she is assuming all recessions cause deflation. The double recession of the seventies still required intense and protracted Fed tightening to get rising prices to fall.
One reason for the above observation is that we know that our own vehicles will not operate without whatever fuel they are designed for. This is clearly also true for all the delivery trucks in the world, and for farm machinery and for ships that transport goods across the ocean. With less fuel, fewer trips of many kinds will be made. Workers will be laid off. This dynamic sounds a lot like recession.
Yes, and it only corrects prices through years of pain. Even then, rarely down to $40 oil.
The expected lower world oil supply in the near future is not an issue that can easily be resolved. We are already seeing that even with a supposed settlement, disruption in oil supplies seems likely to continue and even to worsen, as the various limits on buffer supplies are reached. Unfortunately, we cannot expect the situation to be completely fixed for several years.
She really likes to argue against her own thesis, doesn’t she?
[9] We are ultimately dealing with multiple not-enough-to-go-around scenarios. This situation will tend to increase conflict in the world.
Which also increases prices, including the price of oil because wars burn a lot of fuel!
She then uses the example of musical chairs to show how, as you take the supply of chairs down one at a time, people start to fight over the remaining chairs.
Yes, and how consumers fight, besides physically, over a good they want, is with money. Those with enough to pay a better price get the limited goods.
Wars also tend to infringe on supply routes, so they create product shortages, which raises prices.
If food prices are too low, farmers will be unhappy that their earnings are low. They may stop farming and try to make a living from putting their land into a land bank and working elsewhere.
Yes, and that makes the price of food go way up, not down. So, yes, we will have stagflationary recession.
They clearly need to stop giving pot to the Alzheimer’s patients.
What took place in 2020 seemed to some of us to be close to miraculous. The strange actions related to Covid greatly brought down the price of oil. Covid also provided an excuse to give money to households.
Yes, because everyone stopped traveling! So, they didn’t need oil. The only reason they will stop traveling is if the price of oil goes so high they cannot afford to travel. Back then, they stopped buying fuel ALL OVER THE WORLD because they were forced by their governments to stay inside and away from public venues and because international travel was hugely restricted. There is no outside force holding down the use of oil—just the price and availability of oil. Back then there was plenty of availability of oil. That meant oversupply of oil in the face of forced shutdown in demand, which, of course lowered oil prices.
This lady keep arguing my points for me, thinking she’s arguing her own. So, I dispense with her argument as nonsense kind of like this guy:
No shortage of fools
A dipstick member of congress in his own words:
This is an historically familiar argument deployed by pathetically out-of -touch rich leaders, but just with a different flavor than we saw far back in history. It goes like this:
Reporter: Mr. Congressman, The people can’t afford beef for the Fourth of July.
Congressman: Then let them eat lobster.
Thank you, Mr. Antoinette.
They cannot afford beef because, as another article below points out, beef prices are remaining highly elevated.
U.S. grill masters and home chefs face sizzling beef prices for summer cookouts as drought and wildfires have discouraged ranchers from expanding cattle supplies that are at their lowest levels in 75 years.
And eventually rising prices will cause ranchers to expand herds to fill the demand at higher prices, but years of pain come first. Just as it is taking a long time for higher beef prices to cause production to rise and prices to finally fall, so it will take a long time for higher oil prices to cause production to rise so prices can fall.
President Donald Trump has encouraged low-tariff imports of Argentine beef to cool U.S. prices, angering American ranchers, and directed the Department of Justice to investigate whether U.S. meatpackers are colluding to raise prices.
But, President Trump, I thought you and all your acolytes swore that tariffs don’t raise prices. Therefore, how will removing tariffs lower prices? How does that math work? Man, thinking is in short supply these days, which means fools are in abundant supply. .
The average retail price of one pound of lean and extra lean ground beef hit a record $8.62 in May, up more than 12% from a year earlier, according to the latest data from the U.S. Bureau of Labor Statistics.
And prices were high a year ago. So, you see it takes a long time for soaring prices to finally clobber people so long that they reduce demand enough to curb any further rise in inflation.
Oil prices already actually too low
Meanwhile, in another article listed below, ING Research says that oil prices have already overshot to the underside by trading down around $70/bbl (still far above $40). My argument exactly, and one I said would happen before it did happen because I try to deliver “the news before it happens.”
And now, ING Research says the selloff is likely overdone, with the [oil] market too optimistic about the prospects of a quick resumption of normal oil flows through the Persian Gulf. First off, tit-for-tat strikes between the U.S. and Iran over the weekend have highlighted the fragility of the 60-day ceasefire, threatening market hopes for a quick resolution and normalization of global energy flows. Second, financial and physical indicators suggest that the broader market has heavily overshot to the bearish side.
The only thing investors need in order to swing away from their overshoot to the downside on oil prices is a catalyst to swing back upward, and that will likely come as soon as real shortages start to show up, or when this happens:
Finally, speculative gross short positions held by money managers on ICE Brent have soared to historic highs, increasing the selling momentum but also creating the perfect conditions for an oil price short squeeze.
More evidence of the stealth recession
One last article, and then we’re done for the day (because it brings us back to that stealth recession I’ve been saying we are already in):
Jobs continued to come in worse than expected, now down to a dismal 57,000 increase, barely more than a third the recession threshold of about 150,000 added jobs per month. You can see here how spotty job growth has become since Trump took office:
Remember how everyone got excited about that one month that spiked up in 2026, especially the Trump administration, which claimed it as evidence of the “golden era” now arriving? And remember how I did NOT?
As you can now see, it proved to be more of an anomaly than a reversal in the stealth recession. There are a lot of visible holes in the economy in those figures in the final third of that graph, showing that, so far, tariffs clearly have not resulted in job growth. Almost every month has come in below a recessionary level—one more piece of evidence confirming my claim that we are in a stealth recession already, given that we cannot trust “real” GDP growth as a measure of the economy because it isn’t real because inflation is so under-reported.
As is the usual government pattern I’ve pointed out again and again, prior months of job reports were also revised down by as much as 43,000 per month. That, again, reinforces my continual claim that the government issues overoptimistic reports for the month everyone is looking at. Then, when we move on to the next news cycle for jobs, it revises past months down to reality when fewer people care.
This article wound up being a Deeper Dive because this weekend is a holiday, so I won’t be doing any writing then. So, there you go.
Read the full article here