The Coming Oil Shock and Where Investors Could Profit

International Man: The Strategic Petroleum Reserve was created in the aftermath of the 1970s oil shocks to shield the country from severe supply disruptions. Since the war with Iran began earlier this year, Washington has been tapping the reserve once again. Is this precisely what the reserve was designed for—or is it being deployed to suppress oil prices and defer the political fallout from the crisis?

Doug Casey: I have always objected to the very concept of a government-run strategic oil reserve, even though oil is the single most critical material for industrial civilization and normal life would collapse without it.

I understand the biblical principle of setting aside reserves during years of plenty to sustain years of scarcity. But the government is the wrong entity to hoard oil—or anything else. Washington learned nothing from the Teapot Dome Scandal, in which the Naval oil reserve was looted during the 1920s. State involvement in the economy invariably breeds grift and corruption. It distorts supply and demand while sending false signals to the market.

Furthermore, there is reason to believe the oil reserve is being used to artificially suppress prices for purely political reasons. Trump no doubt believed it would derisk his attack on Iran. Its very existence encouraged him.

The oil crises of the 1970s and 1980s were not caused by a lack of oil. They resulted from producers' logical reaction to being forced to accept America's debased fiat currency, and served as punishment for US intervention in their affairs. The 1973 Arab oil embargo, which quadrupled crude prices in a matter of months, demonstrated how quickly a supply-driven shock could cascade through an industrial economy dependent on stable energy flows. Congress authorized the SPR under the Energy Policy and Conservation Act of 1975 in direct response to that vulnerability.

Holding commodity reserves is a sound idea—but that is precisely what speculators do for a living, not government bureaucrats. Speculators analyze markets and buy when prices are low, during gluts when nobody wants the commodity. They sell when prices are high—which, coincidentally, is exactly when the commodity is most needed. That is why speculators are the friend of society, even though everyone has been taught to hate and fear them.

The SPR currently holds approximately 307 million barrels against a rated capacity of roughly 714 million, meaning it stands at about 43% of capacity. The current drawdown runs at around one million barrels per day. Theoretically, that allows roughly another 300 days before it is empty. For context, that daily drawdown rate is roughly equivalent to 1% of total global oil consumption, meaning the reserve can absorb only a modest fraction of a sustained disruption. My expectation is that the situation will continue deteriorating, and it will be depleted before year-end. There is little chance Trump will attempt to refill it, because purchasing that volume of oil would drive prices 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: The reserve is reportedly at its lowest level since 1982, and as noted, it is still depleting. There is some hesitation about draining it completely, partly due to the mechanics involved and partly because another crisis could arise. In any case, several million barrels pumped into the salt caverns can never be recovered owing to absorption, evaporation, wall-coating, and similar factors—that oil is wasted. When you factor in the costs of transporting oil there and pumping it out, I would argue the entire concept was a boondoggle and fundamentally uneconomic.

The real problem is not oil itself. What matters are the products that come out of refineries. Raw petroleum has limited direct use; it must be cracked into gasoline, diesel, kerosene, asphalt, and other byproducts. The real bottleneck is at the refinery, not the wellhead—and, of course, at Hormuz and Bab el-Mandeb. The Strait of Hormuz, through which roughly 20 million barrels of oil pass daily—about a fifth of global consumption—represents the single most concentrated chokepoint in the world energy trade. No comparable alternative route exists for Gulf crude on that scale.

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

Doug Casey: I expect the war will not only drag on but become significantly 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 moving through the Strait of Hormuz. It appears the Houthis—a rebel group that fought the Saudis for years—will keep the Bab el-Mandeb at the southern end of the Red Sea closed. Meanwhile, Ukrainian forces are attacking Russia's production and refining facilities, which greatly compounds the problem given that 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 retaliate against refining facilities across the Middle East, including those of Saudi Arabia. It is foolish to place any faith in Trump's rants on Truth Social. The war will continue, accompanied by 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 existence of the SPR gave Trump the running room to launch this war of aggression in the first place. It was a massive miscalculation. He has punched the tar baby, and given his egomaniacal nature and his undue commitment to Israel, he cannot withdraw. Nor will the Iranians, who seek righteous retribution along with damages said to exceed $300 billion.

The chances of a negotiated settlement are extremely low, given the nature of Trump's bullying, threats, language, and overall dishonesty—beginning with the unprovoked surprise attack launched 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. It would be best to do so voluntarily before being 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 mountain of debt in the world must be serviced somehow. A severe economic slowdown caused by a shortage of petrochemicals will make it impossible for many entities to service that debt. If one company cannot pay, the companies it owes could collapse in a daisy chain. Things could easily culminate in a deflationary collapse resembling the last depression. That is obviously the last outcome the Fed and other central banks want to see.

So they will undoubtedly create hundreds of billions or trillions more dollars to hold the current order together, which will produce much higher levels of inflation.

This means investors should avoid owning other people's debt, including government bonds. In the past, bonds have always been treated as a refuge. Not this time.

The best way to position for this situation is to own shares in oil companies that have no exposure to the Middle East, as well as mining companies. Both sectors are extremely out of favor, carry low P/E ratios, and offer high dividend yields. Their products stand to benefit from the inflation of fiat currencies.

There is every chance that the current war between the US and Iran, cheered on by Israel, could evolve into World War III. Any or all of these developments could serve as the catalyst for what I call the Greater Depression—a period when the general standard of living drops significantly and when distortions and misallocations of capital are liquidated.

We have witnessed a slow decline for the average person over the past 50 years. But Trump's misadventure with Iran and his prolongation of the Ukraine-Russia war could push the world over the edge of the precipice.

It is certainly possible to profit from these events, but it is more important simply to 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. Copyright © Phyle1, LLC.