This may be my most interesting blog of the year.
In September I blogged about why I and so many analysts were so wrong about interest rates dropping in 2023: Why I Was So Wrong About Interest Rates. I focused on wage growth, savings drawdowns, lag effects of rate increases and, most importantly, government spending. But, I missed a major factor that I have since seen illuminated in numerous blogs and podcasts.
In June of 2022, oil prices approached $120 per barrel right when inflation signals were screaming “red alert!” This panicked economists because oil was only $70 per barrel a year earlier; once 2022’s much higher oil prices worked their way into the economy, inflation would only be that much more out of control – just like we saw in the 1970s when oil prices doubled.
Economist David Woo was just on this Julia La Roche podcast, explaining the extreme importance of low oil prices not just with respect to inflation but to the economy overall. And – it was the huge drop in oil prices that helped the economy do so well in 2023!
The Biden administration well understands this, per Mr. Woo, and that is why they released sanctions on Iran and Venezuela – so both countries could pump far more oil into the market and bring down prices. Mr. Biden also drained the U.S Strategic Petroleum Reserve (SPR) to further reduce prices – and it all worked.
What is particularly interesting is that Iran is well aware of Mr. Biden’s need for cheap oil, per Mr. Woo. And that gives them license to do whatever they want on the terror-sponsoring front, as they know that Mr. Biden will never do anything in retaliation that might spark a war in the Middle East, as that would push oil prices through the roof – and crush the economy, spark inflation and cost Mr. Biden re-election.
There is a famous macro analyst who goes by the name of Doomberg – and he has been writing about oil and energy at length in recent weeks and making enormous waves in the macro world. One of his points is that we have been hearing myths about the days of “peak cheap oil” long being over for decades now (it was a huge theme when I was a kid in the 1970s even). Not only have we NOT seen “peak cheap oil,” but energy prices overall will likely plummet in the future because we’re finding so much of it.
More importantly, Doomberg and many other analysts (like Erik Townsend) frequently remind us that energy is not merely an input, but it is what drives prosperity more than almost anything else.
Doomberg: “Energy is not an input into the economy, IT IS THE ECONOMY. Humanity organizes its economic activities to ensure a steady growth in the extraction and exploitation of primary energy because energy is life, standards of living are defined by how much energy is available to be exploited, and all humans everywhere are perpetually seeking a higher standard of living.”
In the 1970s, high oil prices and an oil embargo nearly brought the entire U.S. economy to its knees because the U.S. imported 50% of its oil back then – and everyone thought the problem would only get worse. But – today, America is not only 100% oil-independent, but we actually export it. Our natural gas supplies are surging even more – with gas prices hitting record lows.
There is another side of this though too: when oil prices remain this low despite the turmoil in the Middle East, it is a fairly strong recession signal, as it signals much weaker demand overall. So, that is a very strong indicator of lower rates in the future (both from lower inflation and a softer economy).
Nonetheless, today’s much lower energy prices overall are a huge tailwind for our economy – and Mr. Biden well understands that, so expect low prices to continue.
Perhaps more important than everything else is this message though: the future is very bright when it comes to the prospect of abundant and very cheap energy – with oil, natural gas, nuclear, wind and solar power prices all likely to plummet.
And ultra-cheap energy could literally save us all – no matter how bad our problems might seem now.
The power of cheap energy cannot begin to be overstated.
