Oil Just EXPLODED Higher and it's CRUSHING The Economy

Are oil prices about to wreak havoc and

crush the economy all over again if the

energy Market's initial reaction is

anything to go by is Sam Jackson's

character said in Jurassic Park hold on

to your butts oil's response to the

announcement of more sanctions by the

outgoing Biden Administration was

something to

behold contrary to popular perception

though soaring oil like this is not

inflationary and we have loads of

examples proving this Beyond every doubt

including three of them in the past

three years alone that's not where the

pain is or where it ends up in order to

really appreciate what that means and

how the prospect of another oil Spike

fits into everything we've got to First

understand the current economics Small E

not the crap you hear from jpw and all

over the media both social as well as

traditional start with what people mean

when they cite inflation they're

actually referring to something else

entirely

and when anyone points to the hardships

of inflation what they really mean is

impoverishment we all got poor for the

pandemic and in that context

disinflation means something else

entirely too the public expects one

thing and they really shouldn't because

everyone has been misled so how oil

interacts under these conditions it ends

up making everything the SMY economics

worse just not in any way that looks

like the 19

70s as I said the evidence and proof is

everywhere we just need to explain what

it is we're actually talking about and

what we're really seeing and then we can

start to make sense of the small e

economics and what that would mean under

another possible oil price spike more

craziness ahead from the energy markets

at least in the short run and let's hope

it stays in the short run but first what

actually happened what happened was last

Friday the outgoing Biden Administration

decided they were going to go full force

into sanctions on Russian entities

according to CNN the Biden

Administration on Friday targeted

Russia's energy sector including its oil

industry with some of the harshest

sanctions to date meant to cut off

funding for moscow's war with Ukraine

the new sanctions against the kremlin's

largest and most important source of

Revenue hit hundreds of targets

including two of Russia's largest oil

companies public joint stock company

gazprom neft and the Russian thing I'm

going to pronounce the sanctions also

Target nearly 200 oil carrying vessels

many of which are accused of being part

of the so-called Shadow Fleet that works

to evade sanctions as well as oil

Traders and energy officials they also

go after Russia's liquefied natural gas

production and exports and then even I

mean they were talking about sanctioning

Traders insurers a couple of us-based

oil services firms where they told them

to knock it off and even India said that

they're going to abide by the new

sanctions when the Indians are normally

very friendly to Russia so the potential

of disrupting Russian flows of oil more

than they already have been is

potentially serious we don't know how

the system is actually going to react

yet just yet because it hasn't really

started but the potential is for higher

oil prices ahead oil prices have been

relatively weak given the supply

situation the non-economic r reduction

in Supply from OPEC and Saudi Arabia

normally we would expect oil prices to

rise anyway just not in the same fashion

that we're seeing over the last couple

of days and it hasn't been oil prices

like gasoline that I pointed out in the

recent video had been unusually weak for

the

winter WTI was still under $70 per

barrel on December 26 when it should

have been rising more than that it hit

7392 so it finally got some winter

seasonality last week some seasonal rise

there but after the announcement on

Friday and then continuing yesterday WTI

got almost to 7 $9 per barrel 7882 by

the close even more important in all of

this is the curve shape the WTI Futures

curve shape it absolutely exploded

exploded steeper higher more

backwardation the one-month calendar

spread that was 68 cents last week and

that soared to a152 yesterday and backed

off to around a120 today the three-month

spread the more important 3mon Benchmark

spread that was around a$1 60166 heading

into to Thursday and out of Thursday by

yesterday Monday morning Monday

afternoon it was

$45 we haven't seen the three-month

calendar spread that steeply backward at

since October 2023 and backwardation

simply means that the market is afraid

of a production or Supply shortfall and

therefore the price of the the more

current prices the front contract or

those nearest to it are much higher than

those further down the curve which

disincentivizes anyone from trying to

store oil get that stuff into the

marketplace because we want it right now

we're afraid we're not going to get

supplies down the road and the the

explosion in oil prices was entirely at

the front end which is Mak which what

makes this this Threat all the more

serious all the more difficult to

potentially deal

with but you hear this everywhere

whenever oil prices Surge and look like

they're going to continue to go higher

that's what the steeply backward a curve

indicates that there's going to be some

Panic buying in the front part of the

future curve whenever oil prices surge

like this like they had last year and

the year before and the year before that

what you hear is that this is highly

heavily

inflationary and it's it starts with a

mistaken impression of what happened in

the 1970s oil prices were not the great

inflation by the time you got the OPEC

oil embargo in 1973 late 73 the great

inflation was already 7 or eight years

old by then the inflation and the oil

price shock two very different things

but most people put them together

because economics is such a horrible

discipline at actually explaining

especially where it comes to monetary

fundamentals but every time oil prices

surge you hear the same thing that it's

inflationary heard it in 2022 when

Russia invaded Ukraine and sent oil

prices soaring WTI got up to $122 per

barrel and everybody said this is great

inflation too especially as it came

during the thick of the supply shock

when cpis were already Rising pretty

sharply but there was no great inflation

to oil didn't cause the great inflation

to begin with instead in 2022 that surge

in oil prices was the final straw that

broke the global economy in fact by

September just a couple months later WTI

was back down to

7671 during what was a monetary

deflationary monetary crisis in not just

the UK but all all throughout the euro

dollar system so rather than unleash a

1970 style s surge in inflation the big

oils pric spike in

2022 proved to be disinflationary now I

me we'll talk about what it mean when we

talk when we say disinflation in just a

second here we saw it again in

2023 after realizing the economy was

broken OPEC in November of 2022 started

to curtail production that wasn't enough

in 2023 Saudi Arabia abdulaziz's

lollipop they decided they going to cut

back production even more and so through

the summer of 2023 right on into

September once again WTI got got up to

around $94 per barrel and once more

everyone said This is highly

inflationary interest rates are going to

have to go higher for longer stay there

forever and instead the opposite

happened not just about interest rates

but in actual consumer prices What

followed from that oil price spike was

one of the most disinflationary periods

in either the CPI or PC deflator and not

just in the US but around the world that

we've seen yet oil price spike didn't

become inflationary it actually led to

and contributed a lot to

the retreat in the economy afterward

that was the second time in the cycle so

far and then it happened again last year

you had a mini oil price shock when the

the rebels in Yemen started firing

missiles into the Red Sea forcing

shipping companies to re-root their

their cargos all over the place and it

led to WTI rising to around $87 per

barrel by April some of that was

seasonal factors but still $87 per bar

per barrel by April and what followed

was once again even more disinflationary

period than the final months of 2023

because oil prices are not inflationary

they cause in these circumstances they

cause the economy to retreat and that

retreating economy pulls down prices of

other

things part of the problem is a big part

of the problem is we all just use the

term inflation now I try to separate

this out when I talk about consumer

prices rising for other reasons than

legitimate inflation I say consum

consumer price increases or acceleration

but even so what you hear everywhere the

word inflation is used anytime consumer

prices are going up for any reason and

that is a mistake because consumer

prices can rise for other reasons

legitimate inflation is as Milton

Friedman said and Allan Greenspan and a

whole bunch of economists seconded

inflation is always and everywhere a

monetary phenomenon it's the old adage

of too much money chasing too few goods

but in this case it's not govern govern

ments that print the money the money

doesn't come from the Federal Reserve

the FED doesn't have a money printer

instead in the modern system it's a bank

money money phenomenon Banks create too

much money in credit then that chases

too few goods that's where you got the

1970s that's also where you got a

confused Federal Reserve that had no

idea where the inflation was coming from

in the 1970s which gave rise to all of

these misconceptions about oil prices

and wage price Spirals and everything

that you hear nowadays they don't know

about the euro dollar monetary system so

they've ented other explanations for

what is always and everywhere a monetary

phenomena that's not what happened in

2021 that was not a monetary phenomenon

that was instead a supply shock and a

supply shock is simply where you have

non-economic factors that hinder the

availability of certain supplies whether

it be goods or services and more often

than not it's governments and politics

that are responsible for creating what

usually is like a bottleneck and prices

tend to sore all at once during a supply

shock contrary to legitimate inflation

like the 1970s where inflation built

slowly and steadily and continuously

throughout the years and a supply shock

what you see is prices soore right out

of the gate and then come down over

times you see these almost vertical

rises in price rates and then they don't

come back down in a straight line there

is no

symmetry however understanding all that

there's there are a couple other further

misconceptions starting with the

expectation that if o if prices and the

supply shot consumer prices soore and

they go they surge way ahead in the

initial stage shouldn't they then come

back down just as quickly and as far as

they did in the initial upswing and

that's just not the case we don't see

Supply shock doesn't mean prices go way

up and then come right back down to

where they started in fact that's the

biggest misconception the biggest

problem that we have in certainly

calling this inflation as well as

identifying what's really the issue here

prices go up quickly to a new

equilibrium but then they stay there so

a supply shock in terms of prices

specifically prices it's more akin to a

phase shift rather than steady inflation

like the 1970s prices shoot higher they

reach that equilibrium and then they

remain there so when everybody talks

about inflation even these days what

they're really referring to is that

phase shift not ongoing inflation not

1970s sty what they're referring to is

in that phase shift how everyone became

poorer for it you lost a massive amount

of purchasing power seemingly all at

once and the fact that you're not

getting it back that's what everyone

characterizes as ongoing inflation and

so in that context disinflation is

something completely different

disinflation doesn't mean that prices

are going to go back to where they were

where we started from say 2019 instead

disinflation all that means is this the

phase shift the supply shock phase shift

is either finished or is in its final

stages and that again gets into a whole

lot of public anger it's a reason why

governments around the world have been

falling it's all about the fact that

once you under go that phase shift

there's no way to go

back so you see this all over the world

producer prices consumer prices this

inflation doesn't get doesn't mean

prices are going back to where they were

it just means that the phase shift has

run its course or has largely run its

course it's winding down it is as most

people have have recognized it is

impoverishment it is it is a one of the

worst economic cases that we could

possibly go through but when most people

use the phrase inflation that's what

they're referring to the Lost purchasing

power that already happened and it's not

being fixed to them disinflation means

nothing it doesn't help what erase that

huge loss and they're absolutely right

about that so when they rightly complain

about the price of food or new cars or

even used cars it's not really inflation

it's that phase shift that pushes that

pushed prices up almost all at once and

it is leaving them there which is what

they're really really talking about when

they talk about inflation the fact that

prices got pushed to a new equilibrium

and they're staying at that

equilibrium and the way it's supposed to

be cured is that incomes need to rise to

make make up that difference and this is

where the weak labor market comes in

Weak labor market comes in what the weak

labor market says is that it's not going

to happen it's not going to happen

people are not going to be made whole

wages are not going to continue to soore

jobs are not going to be plentiful

enough there isn't enough earned income

in the real economy to make up for that

lost purchasing power so that's the

other side of the inflation people are

referring to they're referring to the

fact they've been impoverished and they

have no way to fix it that's the

complaint about inflation even though

none of this is actually inflation but

understandably to most people they don't

care about the terminology or the

definitions they're referring to

inflation which means correctly they've

been left behind by the

pandemic and as I said this is why

governments around the world have been

failing whether the UK the United States

Canada France Germany even Japan the

ruling part party there suffered

enormous electoral setback last fall

many more are going to happen beside

those because no one has answers and the

reason why no one has answers is is they

don't have a handle on the economics

Small E economics here and that's where

Oil comes in it doesn't create more

inflation it makes this already bad

situation even worse part of being

impoverished means that you're unable to

spend on the things that you want to the

cost of necessity has gone way up which

means you have less room for other

things that that everybody wants to

spend on and Along Comes oil prices with

another price spike it's not

inflationary what that does is mean it

means you have to spend even more on the

same Necessities leaving you even less

for everything else you feel the pinch

you feel the poverty you feel the

impoverishment but it's not inflation

and oil price spikes are not

inflationary that's why what follows

from them are weakness in the economy

weaknesses in the economy as well as

disinflationary consumer prices by

disinflation here I mean price rates

that continue to slow down even though

price changes and prices themselves are

never going to go back to where they

were before this is why we see consumer

surveys for example F frbny survey of

consumer expectations which came out

just yesterday you don't see any hint of

consumers being afraid of reigniting

cons Consumer Price pressures I won't

say inflation here that's not what

they're focused on in fact the price

expectations according fbny continue to

be anchored right around the 3% Mark and

that's basically the long run 2010s

that's as far back as the data goes 2013

it's anchored right at the pre-pandemic

level because consumers see Consumer

Price pressures as being back to where

they were before and they're correct

about that but they also note that

they're now more and more afraid of the

labor Market that's the downside of the

supply shock in this phase shift too

income expectations according to FB and

those dipped to the lowest since March

of 2021 now it isn't huge and it's only

one month but again it goes along with a

whole lot of other data that suggest

consumers are increasingly concerned

about jobs and income and speaking of

jobs maybe the most striking finding in

the entire survey the mean probability

of finding a job in the next 3 months if

a consumer happens to lose theirs that

job finding probability fell to 50.2 4%

in December so the same month The

Establishment survey is soaring more and

more Americans are afraid what of what

might happen if they actually lose their

job that's consistent with all the rest

of the data starting with a household

survey the unemployment statistics jolts

lack of hiring that's what Americans are

saying we're not afraid of consumer

price pressures we've already suffered

the Lost purchasing power and the weak

labor market means we're never going to

get it back back in fact job finding

worries those ramped up around March of

last year with a probability now closer

meaning lower to the pandemic than 2019

and before and also at one more on top

according to the survey consumers are

afraid of missing a debt payment as well

that one jumped to 14.16 per which

nearly matches to September high for the

cycle so he put all these things

together consumers are not concerned

about inflation what they're saying is

we've already been impoverished by the

supply shock even though we don't know

what it is we don't know what the

terminology is and now we're afraid of

the downside of the supply shock means

what that means in the labor market no

one is hiring and because we're worried

about jobs because we're worried about

incomes because we don't have purchasing

power we're worried about missing a a

debt payment exactly the data that I

talked about with revolving credit also

from the Federal Reserve uh consumers

are pulling back on credit card use

because they're worried about the labor

market and missing a debt payment this

just reinforces all of weak labor market

Notions so oil prices are not

inflationary they do create a temporary

and direct bump in consumer price rates

like the CPI but when the economy is bad

they simply add more Badness to it and

break it down further that's why we saw

in 2022 and again in 2023 and again in

2024 the most disinflationary short-run

periods tended to fall in fact they've

directly followed oil price spikes oil

prices surge which means that consumers

have to spend more on the necessity

leaving them less for everything else

they feel that difference having already

been left with less for everything else

because of the phase shift that was not

inflation when people refer to the term

inflation what they're really saying is

I got poor for the pandemic and nothing

is changing that fact you're already

poor you can't spend on things like you

used to like you would like to you feel

that impoverishment and then Along Comes

oil prices plus a weak labor market and

now you know there's no way back you're

already worse off for it and it just

makes the bad situation that much worse

just not

inflation of course this week labor

market is not at all what the

establishment survey showed at least the

headline the rest of the establishment

survey different stor