Inflation, Oil, and Today’s Wars

I am going to write a post about a lot of things. All tied into one. I really hope it makes sense. We’re going to cover inflation, war, short squeezes, and more.

INFLATION GO UP

The first thing on my mind is Inflation, rising oil prices and rising food prices. These are never good things. In the last two years, we have seen infamous price swings first caused by the supply shortages after Covid and now a war in Europe. Both instances share something in common: shortages.

Let’s quickly look back at Covid, when everything shut down, then everything instantly opened back up. Remember that moment? Supply could not meet demand fast enough, ports were backed up, truck drivers were off duty, and trains were parked. No one could ship goods globally fast enough to satisfy demand. Suddenly there’s a spike in prices as demand outpaces supply.

But that’s the key here: prices are being squeezed higher by shortages, not by inflation. Shortages can be fixed, inflation, not so much.

STEPPING ON YOUR OWN FOOT

Inflation is measured using a formula called CPI. This formula is made by people just like you and I. The formula adds oil, food, and other little things together. Then the formula is compared to prior years and we say things like “Wow things are more or less expensive today than they were last year!”

The entire process is a little silly, because, well the things can drastically change the core inflation number. We are seeing that now with oil as it’s squeezed because of a war in Europe. What happens when supply chains get disrupted? When goods can’t move as fast? When goods can’t even be produced? Number go up.

The only way to fix this issue is to increase supply. So you can expect the CPI to keep going up until new supply is found. The Fed can’t change the supply of oil by increasing interest rates. Actually, increasing interest rates to combat a price squeeze caused by a shortage makes zero sense. J Pow, I am your biggest fan, but not right now.

HOW WE TALK ABOUT INFLATION

What I find so interesting is how we have suddenly merged the word inflation to basically mean anything about prices going up without an examination into why prices are going up in the first place or how long it might last.

There is a difference between the inflation in Zimbabwe and the inflation this post is about.

Shortages are particularly interesting because companies, people, and policy makers who have built businesses based on harvesting and selling all of these goods and services are in a position to fix it with a little ingenuity. They need to look elsewhere for supply, find new suppliers, and continue operating. Or, even better, someone comes along and builds new technology that renders everything previous totally pointless.

Maybe we need the Beyond Meat of Wheat?
Elon Musk to start a second company?
Or aliens to arrive with a new renewable source of energy?

In the case of oil, America, Canada, and Mexico are sitting on some of the largest oil deposits on planet Earth. If you go into South America, both Brazil, Colombia, and even Ecuador are rich with oil.

Also, there are some dirty secrets out there. Venezuela more oil than they know what to do with. Also, being in South America, the shipping times would be extremely fast, lowering the cost of oil even more because now you get to remove all of the costs related to giant tankers that move oil from the Middle East.

There’s also, dare I say it, Iran. I know, I know there are some political things I’ll never understand. But they are sitting on huge piles of oil. The point is, we are causing inflation by banning oil from just about every source possible. Stepping on our own feet.

PUMP UNTIL YOU’RE GREEN

Now, I have written a lot about oil and I should be clear, I understand why people might tell me “we can’t pump oil we have to save the environment!” And I would tell them they’re right, I am a very green bro. I want solar panels on my roof one day. At the same time, I also know we can’t switch to green energy overnight.

It’s a balancing act. You can pump oil in the short term while also pushing to go green in the long term. The energy soft landing.

Nevertheless, the transition is happening, and it’s happening fast. What I’ve found is that oil shocks actually increase our acceptance of green energy. More oil shocks speed up our adoption as it goes right into the public domain, even making front page headlines.

Burn oil once and it goes away forever. Install a solar panel and it generates energy forever.

SHORT TERM OIL SOLUTIONS

One difficult aspect for oil prices currently is how our energy markets compete on a global stage. In North America all of the oil companies compete against each other. They drill and sell, drill and sell, and they’re all trying to get the best prices to their consumers. However, these companies are all competing against each other while also, at the same time, competing against a cartel – OPEC.

That is really hard!

For those who play Fortnite or Call of Duty imagine being in a free-for-all with 30 other people while also simultaneously fighting coordinated team. That’s basically OPEC vs. western oil producers. All the western producers are competing against each other while also competing against a group like OPEC. The western energy suppliers are screwed in this situation.

Fix that and you fix a lot.

THE END

Wow what a post. I have not written this much in a long time.

So here we are, caught in the middle of all of this. In a weird place with the Fed raising rates trying to fix inflation, a war going on in Europe, and somehow it all connects back to not inflation, but supply shortages.

As a trader & investor, I love these kinds of moments. They are so important. You can’t just stay the course, doing the same thing over and over again. Shocks like this are what change things fast.

Thanks for reading!