Oil Production Back to Pre-War Levels

Oil exports in the Middle East have reached 98% of their pre-war levels. For a war that has so fundamentally challenged the traditional oil supply chain, this is an incredible achievement. With oil coming out of the Middle East at the same rate that it did before the war, it is only a matter of time before the price of oil comes down. Fundamental tensions have grown in the region, but oil will decrease in price unless some unexpected and fundamental shock happens. These changes interact with gold prices in some interesting and unexpected ways. The growing strength of the dollar even in times of geopolitical tension means that there will be slightly diminished retail demand for gold. The long-term geopolitical effect of the Iran war is yet to be seen, but signs point to greater international stabilization, which could continue to bolster gold prices. With oil prices decreasing the cost of almost every input and consumers heavily weighing the price of gas in their consumption decisions, investor sentiment could become even more speculative and euphoric, historically leading people away from gold.

The Fed’s unpopular decision to raise rates along with the greater demand for US dollars enabled by higher oil output will exert a downward pressure on gold price. While raising rates might shift consumers away from equities, it often pushes them towards cash and strengthens the dollar through a number of means. Raising rates decreases the probability of inflation and also increases the value of the dollar. Foreigners increase their allocation of dollars and US citizens feel less need to turn their dollars into other forms of investment. Higher rates can’t stop inflation, but it can certainly slow it. The open secret of the Fed’s lack of independence from the court of public opinion makes rate hikes far worse than they should be. We continually exchange our future stability for present returns. Oil transactions are primarily done in US dollars, so a higher volume of oil transactions also increases the use value of the dollar. Gold has potential to unseat the dollar in oil transactions as geopolitical tensions continue to escalate, but currently the increase in oil transaction volume will most likely decrease the price of gold.

Although the Iran war is still going, its long-term significance is basically understood. It will most likely increase tensions in the Middle East and decrease faith in the ability of the United States to enforce its will. America is villainized by Europe in the rest of the world, and they were not able to achieve the outcomes that they hoped. It was not a short campaign, but rather a boring and protracted conflict, emphasizing the US’s decreasing military capacity in relation to the rest of the world in the last 50 years. This merely accelerates trends of declining US strength and decreasing international trust. Organizations like the UN and NATO that thought they could control and diminish international tensions are wrong, and investors will seek safe-haven assets more than they would in the same conditions with a stronger international order. All else equal, the result of the war would be an increasing gold price if not for the simultaneous increase in the value of the dollar and return to pre-war oil productivity patterns. If anything, the war escalation of the US fiscal crisis will make it much more likely that the dollar will continue to devaluate as the interest rate continually increases. All Fiat currencies are fundamentally based on trust, and this war has done nothing but remove the world’s trust in the United States of America, both to be stable and to be strong.

The decreasing oil prices and impending end of the war could lead investors to shift away from gold towards more risky assets. Although a war ending and a decreasing price of oil have some economic impact, they are exactly the sort of things that consumers could overweight and begin to invest and spend euphorically, causing a short-term burst in consumption. Seeing oil prices go down from $6.00 a gallon to $4.30 a gallon would be enough to cause many consumers to feel some financial strain lifted from their back, even while their overall expenses are not greatly changed. Investors are humans and humans are not able to understand that short-term price fluctuations often signal little about how portfolio allocation should change over the long-term. Gold price will either stagnate or slightly decrease until investors begin to recognize that the underlying reality of international decentralization and the decline of the dollar has not reversed course.