Coming Oil Shock—and Where Investors Could Profit

International Man: The Strategic Petroleum Reserve was created after the 1970s oil shocks to protect the country from severe supply disruptions.

Since the war with Iran began earlier this year, Washington has been tapping it again. Is this exactly what the reserve was designed for—or is it being used to suppress oil prices and postpone the political consequences of the crisis?

Doug Casey: I’ve always had a problem with the very concept of the government’s strategic oil reserve, despite the fact that oil is the most critical of all materials for industrial civilization, and that normal life would collapse if oil were unavailable.

I understand the biblical admonition about setting aside reserves from fat years to manage lean years. But the government is the wrong entity to hoard oil, or anything else. They learned nothing from the Teapot Dome Scandal; the Naval oil reserve was looted in the 1920s. State involvement in the economy inevitably leads to grift and corruption. It distorts supply and demand, while sending inaccurate signals to the market.

In addition, there’s reason to believe that the oil reserve, among other things, is being used to artificially suppress the price of oil for purely political reasons. No doubt Trump thought it would derisk his attack on Iran. Its presence encouraged him.

The oil crises of the 70s and 80s weren’t due to a lack of oil. They were due to producers’ logical reaction to having to accept America’s debased fiat currency, and a punishment for US intervention in their affairs.

Having reserves of commodities is a good idea. But that’s what speculators do for a living, not government bureaucrats. Speculators analyze the markets and buy when prices are low—when there’s a glut, and nobody wants the stuff. Then they sell when prices are high—which, coincidentally, is exactly when the commodity in question is most needed. That’s why speculators are the friend of society, even though everyone has been taught to hate and fear them.

The SPR currently holds about 307 million barrels, and its rated capacity is about 714 million. So it’s currently at about 43% of capacity. The current drawdown is around a million barrels per day. Theoretically, that’s another 300 days before it’s empty. My guess is that the situation will keep deteriorating, and it will be gone before year-end. There’s little chance that Trump will ever try to refill it, simply because the purchase of that much oil would drive the commodity price higher.

International Man: With Hormuz traffic disrupted and Gulf oil infrastructure under attack, how long can the US keep drawing down the reserve before it becomes dangerously depleted?

Doug Casey: It’s reported that the reserve is now at its lowest level since 1982. As we just discussed, it’s still depleting. There’s some hesitation to deplete it all the way, partly because of the mechanics involved, and partly because a new crisis might arise. In any event, several million barrels pumped into the salt caverns can never be recovered because of absorption, evaporation, wall-coating, and similar factors; it’s wasted. When you include the costs of getting the oil there and pumping it out, I’d argue the whole idea was a boondoggle, and fundamentally uneconomic.

The real problem isn’t oil itself. We don’t really care about oil itself, but the products that come out of refineries. You can’t use raw petroleum for very much. It has to be cracked into gasoline, diesel, kerosene, asphalt, and other byproducts. The real blockage is at the refinery, not the wellhead. And, of course, at Hormuz and Bab el Mandeb.

International Man: What happens if this crisis drags on and another major supply shock hits after Washington has already burned through much of its emergency cushion?

Doug Casey: I expect the war will not only drag on, but become much worse. Considerable production and refining capacity in the Middle East has already been destroyed. Very little oil, gas, and other commodities such as sulfur are going through the Strait of Hormuz. It appears that the Houthis, a rebel group which fought the Saudis for years, are now going to keep the Bab el-Mandab at the southern end of the Red Sea closed. Meanwhile, the Ukrainians are attacking Russia’s production and refining facilities, which greatly aggravates the problem since Russia is a major petrochemical exporter.

The reason Trump called off his massive assault a couple of days ago was fear that the Iranians would counter-assault refining facilities throughout the Middle East, including those of Saudi Arabia. It’s foolish to put any faith in Trump’s illiterate rants on Truth Social. The war will continue, with much higher petrochemical prices and serious shortages.

International Man: Where does this ultimately lead—much higher oil prices, more inflation, energy shortages, a wider war, or all of the above?

Doug Casey: All of the above. The presence of the SPR gave Trump the running room to launch this war of aggression in the first place. It was a huge miscalculation. He’s punched the tar baby, and, especially in view of his egomaniacal nature and undue commitment to Israel, he can’t withdraw. Nor will the Iranians, who want to extract righteous retribution, plus damages said to be over $300 billion.

The chances of a negotiated settlement are extremely low, considering the nature of Trump’s bullying, threats, language and overall dishonesty—starting with the unprovoked surprise attack in the middle of previous negotiations.

Saudi Arabia and the Gulf States, among others, could easily be drawn into a full-blown war. And Israel, with its nuclear arsenal, remains a wild card.

The only solution is for the US to withdraw from the region. It will have to eventually. Best to do so voluntarily before it’s overtly defeated.

International Man: What would a further escalation—and a full-blown oil shock—mean for investors? Where would you look for the biggest profit opportunities?

Doug Casey: The immense and growing amount of debt in the world has to be serviced somehow. A severe economic slowdown due to a lack of petrochemicals will make it impossible for lots of entities to service that debt. If one company can’t pay, then other companies that it owes could collapse in a daisy chain. Things could easily wind up in a deflationary collapse, resembling the last depression. Obviously, that’s the last thing that the Fed and other central banks want to see.

So they’ll undoubtedly create hundreds of billions or trillions more dollars to keep the current order together, which will result in much higher levels of inflation.

This means you want to stay away from owning other people’s debt. That includes government bonds. In the past, they’ve always been viewed as a refuge. Not this time, however…

The best way to play the situation is owning shares in oil companies that don’t deal in the Middle East. And mining companies. Both are extremely out of favor, have low P/Es and high dividend yields. Their products will benefit from the inflation of fiat currencies.

There’s every chance that the current war between the US and Iran, cheered on by Israel, will evolve into World War III. Any or all of these things could be the catalyst for the Greater Depression, which I define as a period of time when the general standard of living drops significantly as well as a time when distortions and misallocations of capital are liquidated.

We’ve seen a slow decline for the average man over the last 50 years. But Trump’s misadventure with Iran and his prolongation of the Ukraine-Russia war could put the world over the edge of the precipice.

It’s certainly possible to profit from these things, but it’s more important to simply survive them. As a practical matter, in a depression, everybody loses. The winners are those who lose the least.

Reprinted with permission from International Man.

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