Life often follows a familiar rhythm. The sun rises and sets, and our days typically progress through a series of predictable routines.
There are gradual changes—summer brings longer days and winter shortens them. Fruits like apples are plentiful in the fall, while spring sees fewer of them.
Most of the time, today feels much like yesterday, and tomorrow is expected to mirror today. Your morning coffee will likely taste just as invigorating or bitter as it did before.
Yet, occasionally, extraordinary surprises confront us. Unexpected events can shake the very foundations of our routine. There are moments when it’s as if the sky is falling.
A stark example occurred on September 16, 2008, when Lehman Brothers suddenly disappeared. That day, financial markets were inundated with black swan events that no one could have foreseen.
Money market shares of the Reserve Primary Fund reached an unprecedented low—they broke the buck, with net asset value (NAV) plunging to 97 cents a share. Who could have predicted such a turn of events?
In hindsight, understanding these phenomena is simpler. Poor choices lead to disastrous outcomes, yet the connection between cause and effect isn’t always clear immediately.
You might indulge in a supersized meal occasionally without consequence, but maintaining that habit for a month would inevitably lead to trouble.
In a similar vein, the breaking of the buck was not a random occurrence; it was the culmination of years of bad decisions and excessive risk-taking.
What other unsettling results remain hidden?
Breaking the Rock
When unfortunate choices accumulate, tomorrow’s outlook can turn bleak in dramatic ways. The seeds of failure ultimately yield toxic outcomes.
The U.S. national debt has now surpassed $30 trillion. This didn’t happen overnight; it is the result of decades of reckless governmental policies and avoidance of accountability.
We anticipate that the burdens of a 50-year debt binge will soon manifest in unpredictable and tumultuous ways. In fact, we are already witnessing fierce inflation—a decline in currency value is only the beginning.
This interplay between dwindling purchasing power and previous missteps could lead to far-reaching and often uncomfortable consequences. Consequently, oil prices deserve closer inspection due to the distinct possibility of them soaring dramatically.
Where to start?
Consider April 20, 2020, a day when West Texas Intermediate (WTI) crude futures shocked the world. The May 2020 WTI crude contract plummeted 306 percent, closing at a negative $37.63 per barrel on the New York Mercantile Exchange.
“Oil prices not only hit rock bottom, but they also broke the rock,” noted Bjornar Tonhaugen, head of oil markets at Rystad Energy.
No one anticipated that oil tankers would become floating storage facilities, yet that became a reality. Can you envision a situation arising tomorrow that differs drastically from today?
Could it be that WTI crude might approach $200 per barrel?
This notion may sound ludicrous, but historically, unexpected outcomes do occur. Let’s delve into the details…
Are You Prepared for $200 per Barrel Oil?
Currently, the price of WTI crude exceeds $90 per barrel, possibly fueled by geopolitical tensions surrounding Russia and Ukraine.
However, this is merely a fragment of the larger picture. A series of poor decisions has compounded to suggest a prolonged phase of elevated oil prices.
There is a prevailing belief among politicians and elites that crude oil prices will decline as global demand shifts toward renewable energy sources. What many fail to acknowledge is that such a transition is gradual. The demand for oil is likely to diminish at a slower pace than supply, especially as investments in production are curtailed.
What did President Biden and his team expect? Perhaps they assumed limiting new oil supply would hasten the shift to renewables, leading to a more sustainable world.
Meanwhile, so-called woke investors and fund managers are convinced they are promoting change to combat climate change, yet this very approach has led to escalated oil prices and their resultant effects on the economy.
What now?
Remember, the remedy for high oil prices… is high oil prices. Elevated prices incentivize oil producers to increase supply, stabilizing prices in the process.
Yet, politicians cannot simply summon new oil supply at will.
One of Biden’s initial actions as President was to freeze new federal oil and gas leases through an executive order on January 27, 2021. Subsequently, U.S. District Judge Terry A. Doughty reinstated the order, clarifying that only Congress holds the authority to suspend oil and gas leasing.
Following this, the Biden administration approved over 3,500 oil and gas drilling permits during its first year, nearly 900 more than were granted by the Trump administration in the same timeframe, according to the Center for Biological Diversity.
Sadly, Biden faces challenges from OPEC and environmentally conscious investors. As noted by Irina Slav at OilPrice.com:
“Recent analyses highlight OPEC’s declining spare capacity, primarily due to underinvestment. Earlier this month, JP Morgan warned that Brent could climb to $125 per barrel as OPEC’s available production capacity could dwindle to 4 percent by the fourth quarter of 2022.”
“This trend is not confined to OPEC alone. The world’s leading non-OPEC oil producer—and the largest globally—has also reduced output. Shareholder pressure and an emphasis on sustainable practices among public oil companies in the U.S. are causing a decline in potential oil production.”
In this scenario, rising prices may cease to serve as a solution for increased supply.
Furthermore, markets can swing wildly, overshooting both upward and downward. Due to this, oil prices could potentially rise far higher than anyone can currently comprehend.
Bear in mind that an estimated 130,000 Russian troops are currently mobilized along the Ukrainian border. Perhaps Putin aims for a resolution that avoids conflict, able to step back without losing face.
Nevertheless, with such a concentration of troops, can we rule out the chance of a sudden escalation?
Remarkable events have occurred in the past, making the prospect of $200 per barrel oil seem less far-fetched.
[Editor’s note: Should the tension surrounding Russia’s actions regarding Ukraine prove more consequential than anticipated, under the leadership of individuals like Biden—who often stir unpredictability—events may unfold that surprise many. Consequently, strategizing to leverage such potential scenarios appears prudent. Paid-up Wealth Prism Letter subscribers will receive detailed strategies in February’s issue, set for release on February 7. If you wish to capitalize on this opportunity, subscribing now is advisable! Your foresight may serve you well.]
Sincerely,
MN Gordon
for Economic Prism
Return from Are You Prepared for $200 per Barrel Oil? to Economic Prism
