While warning signs have been flashing ever since President Donald Trump’s war with Iran resulted in the closure of the Strait of Hormuz, fallout in the form of a major economic disaster is yet to manifest. “That won’t last forever,” writes the American Prospect columnist Ryan Cooper, who warns that “something is going to snap.”
The danger wouldn’t be so looming if the war appeared to be nearing its end, but as Cooper points out, there is little evidence to support such a hope, noting that Iran has “cut off contact with American negotiators, and the two sides are once again shooting at each other. Trump, for his part, recently told a CNBC reporter that I’ really don’t care. I couldn’t care less’ if negotiations are over. They ‘started to get very boring,’ he added.”
So apparently, according to Trump himself, he’s feeling no pressure to make a deal, which is exactly what he said in early May. Cooper warns that this places the U.S. in a dangerous position, because while there hasn’t been a “truly major crisis” yet, “it’s only a matter of time before one or more of the severely strained parts of the global economy breaks.”
Total catastrophe has so far been avoided based on four factors. First, despite Trump’s best efforts to oppose a green-energy transition, companies and countries around the world have leaned into alternative energy as fossil fuel prices have shot up. At the same time, many nations, particularly in Asia, have begun rationing oil consumption, which while painful, has helped stave off collapse. But a third “more ominous” factor, says Cooper, is that the world has been forced to draw heavily on existing stocks of oil and natural gas.
According to Cooper, “Many people saw the Iran war coming, and filled up every oil tanker and storage facility they possibly could. A great deal of that has since been used up. The vast storage complex at Cushing, Oklahoma (regarded as a storage benchmark), has declined from 33 million barrels to 24.5 million — and they can’t be fully emptied. ‘You can’t draw them down to zero because there is gunk at the bottom of the tanks,’ oil analyst Matt Smith told CNN.” At the same time, countries around the world are depleting their reserves.
“We’re approaching unheard of inventory levels,” Exxon Senior Vice President Neil Chapman said recently. “Once you get to that point, then you’ll see price shoot up.”
A fourth factor, writes Cooper, is “the behavior of the media and financial markets. The D.C. political press can be relied on to uncritically repeat Trump’s preposterous lies about an imminent deal, no matter how many times they have been proved false. Traders on oil and oil futures markets, being either deluded by the media or blinded by wishful thinking or simply incapable of believing that the president of the United States is as stupid and insane as he in fact is, have consistently expected the strait to open back up soon…Oil prices again fell sharply after Trump’s latest promise.” Despite this market manipulation, Cooper warns, “Sooner or later, oil traders are either going to face reality, or bankrupt themselves.”
As Cooper points out, “reserve releases and comically underpriced oil futures are effectively subsidizing oil consumption.” While a few countries, primarily in Asia, have taken measures to reduce oil usage, many world leaders “have encouraged their nations to continue using energy at normal levels, and therefore to chew through global inventories more quickly. That means if and when the supply shock hits, it will hit even harder.”
On that note, Cooper dives into the looming crises that are poised to destroy several key sectors of the economy.
“The most obvious one is in oil itself,” Cooper explains. “As storages dwindle and run out, the only way to match demand to supply will be for the price to rise high enough to destroy something like 10 to 20 percent of global oil consumption. And because a great deal of oil demand is obligatory and therefore not very price-sensitive, that price will likely be north of $150 per barrel. That means gas and diesel at the pump in the $8-to-$10 range, and a corresponding price hike for anything that needs to be transported, or involved in plastic in some way, which is to say basically everything.” Other sectors like agriculture, aluminum, and industrial commodities are in similarly precarious situations due to plunging stock and skyrocketing prices, the fallout from which will be wide-ranging and devastating.
And worse still, notes Cooper, “even if the Strait of Hormuz opens tomorrow, these problems are going to take years to resolve.” Oil fields will take months to resume production, vital infrastructure will take years to rebuild, and the need to restock reserves will drive years of structurally higher demand.
What’s more, the situation is still in flux, and it could continue to deteriorate in ways no one has forecasted. All of this, says Cooper, suggests that an economic bomb is about to go off, the likes of which the world has never seen.
“You know what they say,” he concludes. “It’s always darkest right before it gets pitch-black.”
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