The flawed part in the article is the claim that the effect is circular.
Inflation is the change in prices (well, Inflation specifically is the increase whilst Deflation is the decrease), so for Inflation to remain positive driven by oil prices, then oil prices would need to no just go up but to keep going up continuously. If oil prices at some point stop going go up then broader prices stop going up and hence Mathematically Inflation due to oil prices is then 0%
So Iran would need to keep oil prices increasing for inflation to continue to be high (remember, inflation is the change in price, the first order derivative of the price, not the price itself) and hence via the Taylor Rule as explained in that investor letter, for the FED to keep interest rates higher than otherwise.
That means over time oil going up through $150 and up through $200, through $250 and so on.
How exactly can Iran keep oil prices going up if all they have is this one “tap” and they’ve pretty much closed it all already?
Now, you can say that prices keep going up as long as the Supply remains unbalance with the Demand and below it.
True.
The thing is, both Supply and Demand react to higher oil prices:
-
If oil prices keep going up that makes alternative and more costly ways of extracting oil (tar sands, fracking of lower yield reserves) become viable so they will start being exploited and oil will come online eventually stabilizing oil prices, so oil prices stop increasing hence inflation due to oil becomes 0%.
-
Meanwhile when oil prices remain high, the consumer side adapts and reduces consumption. This was something visible during the oil crisis in the 70s and I expect that in the age of EVs it’s going the happen faster and further. We’re already seeing what I believe is and indication of this happening - the increase in the sale of EV cars as a percentage of total car sales accelerated significantly since gas prices went up. This too will eventually cause a new Supply-Demand balance to be reached for a supply without any oil from the Gulf and oil prices will stop going up.
So there’s pressure on both the Supply side and the Demand side which will, given enough time, stop further oil price rises and maybe even bring oil prices down (which would be the very opposite of Inflation) since because there is a delay in producers and consumers responding to higher prices, the price tends to overshoot the final stable value, and this is especially on the consumer side since the moves to replace oil with for example electric, once done don’t easilly reverse.
Mind you, a one-off that will help Iran push oil prices up is the American and European strategical oil reserves which are currently being drawn down to avoid oil prices going up even more, will run out, by which point we will see the oil prices jump up (or go steadily up if the European and American governments slowly reduce the drawing of oil from their reserves over time instead of going full tilt until they’re empty), but as I said, this is a one time event.
In summary, yeah Iran can do this for a little while (maybe a few years) but not beyond that, plus there is a balancing on it from nonviable oil extraction becoming viable and consumer replacement which make the price over time an horizontal asymptotic curve (meaning it tends towards a ceiling at X = infinity) and it’s unclear what the ceiling for oil prices is, but it won’t be a infinite price and even things like $200 a barrel will open up the exploitation of a ton of oil reserves which are currently not viable to exploit because the cost is too high for it to be profitable at current oil prices as well as convince a lot of people to drive much less and to replace ICE cars with EVs.
-
This was a much better article than I expected.
Key take away:
whoever controls oil prices controls the Fed.
… yeah but also the worlds oil supply imploding is likely going to pay off big time for the US and its massive oil production
Yep. That’s the lede the author buries at the very bottom:
Iran needs oil to stay expensive for as long as possible. Every month of high prices is another month of high interest rates on America’s $40 trillion debt.
America only needs oil to stay expensive for a while. As long as rival suppliers are knocked offline, the world signs long contracts with Texas, Alaska and Venezuela (via America). Once those customers are locked in, America no longer needs expensive oil.
This analysis may or may not be what is driving the Trump administration, but it seems flawed to me in two ways.
One, RN Venezuela produces only 1M bpd. My understanding is that even before the natural disasters it would optimistically be 5-10 years and dozens of billions of dollars’ investment before Venezuela’s neglected infrastructure is up to ~5M bpd (its peak was 3M in 1997). Compare the effect of that many bpd on the market, vs say the ~7M that got knocked off when the Saudi East–West Pipeline got knocked out in a drone strike recently.
Venezuela is not a significant source of oil for a decade or more.
Two, for Texas and Alaska, my understanding (based on no more than half-remembered episodes of What’s Going On With Shipping, BBC, and Zeihan) is that there are a number of bottlenecks that are all individually solvable but again on the scale of a decade-ish and dozens-to-hundreds of billions: more ships need to be built dedicated to the needs of these routes, more port facilities on both ends, changes in refining plants for different feedstocks.
Plus ofc it’s more expensive for Asian allies to ship their oil halfway around the world. And they were caught flat-footed as USA failed to be good allies and coordinate a fucking war strategy.
Interesting arguments
they can’t beat the U.S. military
They just need to let the US military’s incentives defeat the US military due to it’s cost-plus contracting system.
And still, people and governments do not want to invest in renewables + batteries (either traditional or pumped-storage hydro). I don’t get why getting as much power as possible with regional sources that can be set up fast and decentralized is not the top priority.
renewables and batteries already exist at a scale that makes them affordable and accessible – it’s the political will to make theem available to purchase wo tariffs that’s at the heart of the problem because it’s made by dirty brown commies.
This really was an interesting read for sure.
Like at this point, a foreign national will control the U.S. military anyway. Either Elon or Iran, which one is worse?
Israel
Well, I can’t say for sure what Iran would do, but Musk is a straight up Nazi racist who cares more about his personal wealth and power than anything else so… I’d say Musk would be worse.
But at least Musk can be terminated quickly and decisively.
Nonsense lol
We certain they can’t beat the US military? Also the national debt is fiction.
