Amid the Trade Tirade,
Oil Is Having a Quiet Riot
By Angela Koch, CEO of U.S. Money Reserve
In an effort to establish fair and reciprocal trade, President Trump recently increased tariffs on steel (by 25%) and aluminum (by 10%) from three of our largest trading partners: the EU, Canada, and Mexico.
Back in June, the administration also hit Chinese imports with $50 billion in new tariffs. In July, they announced 25% more tariffs on another $34 billion worth of Chinese goods and are now threatening to impose levies on an additional $500 billion worth of products from China.
Beijing, the EU, Canada, and Mexico have all responded with retaliatory tariffs of their own — which, aside from the much ballyhooed relocation of some Harley-Davidson plants and angst from soybean farmers — have failed to change the upward trajectory of the economy.
We’ve been repeatedly warned that trade wars are economically calamitous and drive up prices, trigger job loss, and suppress economic growth. But on Friday, the Bureau of Economic Analysis is expected to tell us that the economy grew at an unprecedented four percent (or more) in the second quarter of this year. So all the tit-for-tat restrictions on trade between our allies and economic partners have failed to produce any negative economic fallout — at least for now.
As the global community continues to hand-wring over trade, no one is watching one of the most vital commodities in the world: oil. The price of crude has been downright explosive; analysts have been ranting about oversupply concerns one day and soaring demand the next. The financial headlines present a shifting narrative of terms such as “surplus” and “falling surplus,” “gluts” and “reduced output.”
What’s driving all the madness? First and foremost — Iran. With the reinstitution of sanctions looming and President Trump’s desire to stop buying any and all Iranian crude, some one million barrels a day could go offline. And President Rouhani’s “mother of all wars” threat against the U.S. earlier in the week did little to calm tensions.
And then there’s OPEC, which agreed to raise production last month to offset supply shortfalls, but negotiations among top producers (which include Iraq and Venezuela) were tense — and the resulting agreement was vague. The OPEC nations capped production some 18 months ago in an effort to boost prices, so increasing output would not necessarily be in their best interests.
Finally, when we add a roaring global economy and rising energy demands to the mix, we have ideal conditions for a critical global oil supply shortage. Such a scenario would result in more dramatic price spikes and an ensuing market panic.
Jeanette Casselano, Director of Public Relations for AAA, describes the current situation as highly volatile and recently stated that “July gas prices have been on a roller coaster ride.” Indeed, the price of the average tank of gas has spiked more than 20% since 2017, while WTI crude, often used as a benchmark in oil pricing, is up over 40% in the same time frame.
Oil booms and busts are legendary in the annals of American history, and fluctuations in oil prices have dangerous economic implications. In the summer of 2008, the price of crude catapulted to over $140 per barrel — and by the end of the year had fallen to less than $50. That was about the time Warren Buffett warned that “exploding inflation” — whether in oil or steel — was the biggest risk to the American economy.
It’s no coincidence that the last five U.S. recessions were preceded by a dramatic spike in oil prices. The rising price of oil/gasoline directly impacts U.S. households and consumers by triggering energy inflation. It also results in higher costs for transportation and manufacturing, which undermine business profitability and create a drag on wages and job creation. This can stop economic growth in its tracks.
Rising oil prices also impact gold prices. When crude prices hit record levels in 2008, gold prices rose over 8%. The following year, the yellow metal’s price surged over 21% and, by the summer of 2011, hit an all-time high above $1,900 per ounce.
With veteran oil watchers predicting that crude prices could approach $200/barrel (or more) in the next 12 to 18 months, the risk to the economy is quite clear. Likewise, the benefit of holding gold as a strategic hedge is even clearer.
