Oil is a highly fungible—literally liquid—asset. It will take time, but if oil and gas don’t flow west from Russia to Europe, they will flow east and south to China and India. Supplies that would have gone to those counties will re-route to Europe. Other things being equal, consumption will be restored. And I think it’s likely to increase until the global decarbonization trend finally ends the widespread practice of burning oil and gas for energy some decades down the road.
Still, deconstructing the economies of scale between the largest producers and consumers will make the whole system less efficient and more expensive. This is a paradigm shift. The world is different now. The game has changed.
Triple-digit oil prices may well be the new normal.
I’m sure prices can and will dip below $100 per barrel (or equivalent) in future fluctuations. But it now seems unreasonable to expect them to go back to fluctuating around the old average of $60 per barrel.
I do think we could see lower prices for a while if there’s peace in Eastern Europe soon, or if the lockdowns in China get worse.
But that’s not a sure thing; those factors could be swamped by the Great Reopening. That goes Double if (when?) China is forced to give up on its “zero COVID-19” policy.
I’m more bullish on oil prices now than I have been since the meltdown of 2020 (and that was an aberration).
The point, however, is not to run out and buy oil stocks. It’s that we need to think through the investment implications of our changed world—as we can see in the case of oil. That’s because oil isn’t just any old example. For all the (supposed) good intentions about kicking the oil habit, hydrocarbons are still the world’s dominant form of energy—the lifeblood of the global economy. The main alternatives remain capital intensive.
Ironically, nuclear energy may be the source of energy least disrupted by the New Iron Curtain, even if Kazakhstan were to be sanctioned. That’s not because uranium prices wouldn’t go up—they would, a great deal—but because fuel is such a small part of the cost of running nuclear power plants.
The point is that the new normal is for higher energy prices—and there’s no product or service in the world that doesn’t consume energy in its provision and delivery.
Oil = energy = everything.
In other words, the new normal is going to be higher commodity prices, higher labor prices (wages), higher service prices… a higher cost of living.
China’s lockdowns may hold some metals and minerals prices down in the near term, but when China joins the Great Reopening, I expect prices to more than make up for lost time.
Of course, that doesn’t necessarily mean the global economy will be healthy—not with the fallout from the global economic war still spreading.
Stagflation looms large.
But just because I think triple-digit oil prices are likely to be the new baseline, that doesn’t mean they can’t retreat in the near term. Between China’s lockdowns and the US and EU teetering on the edge of recession, this does seem possible to me. Then again, if Europe sanctions Russian oil, prices might rise despite the China lockdowns. And if Putin decides that stopping the flow of oil and gas to the West will hurt his enemies more than his people, he might just do it, sending prices through the roof.
The honest truth is that I don’t know how this will play out in the near term—and I wouldn’t believe anyone who says they do.
But apart from the near term, I am very bullish.
I also stand by my bullishness on uranium. I see the current correction in this space as an opportunity for those who missed it before. I do think that—absent a major nuclear incident—prices will go higher.
That’s my take,
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