Why oil probably won’t go to $150 a barrel

By Brett Arends

Three reasons to be skeptical of the current panic

Oil could rocket from $100 to $150 a barrel, some on Wall Street are starting to say. Are they right? Of course. Oil could even go to $200 a barrel. Or $500. Do I hear $1,000? Why not? The bigger the prediction, the better the chance your guess will go viral. Free publicity for your Substack. More appearances on TV. Knock yourself out.

The operative word, of course, is “could.” Anything is possible.

Maybe I’m going to regret this. But after decades working in the markets and the media, right now I can think of three good reasons to be skeptical of the current panic about the prices of oil, natural gas and gasoline.

These are, in no particular order: popular delusions and the madness of crowds, political considerations, and basic economics.

Let’s start with the first one.

I’ve lived through so many popular delusions, mass hysterias, moral panics and group hallucinations since the dawn of our terrible modern internet age that they have become as predictable and boring to me as a Hollywood blockbuster.

I have stopped watching mysteries on TV because I can tell whodunnit within the first 10 minutes.

Among the many tedious features of market panics is the well-known cognitive error of catastrophizing. Oil “could” go to … anything, really. (I remember during the Deepwater Horizon oil-rig disaster in the Gulf of Mexico [sic] in 2010 otherwise serious people saying the entire gulf was going to be destroyed for generations. No one would ever be able to go sailing or swimming again. All the fish would die. All the coastal towns would be destroyed. Apocalypse.)

Younger people – so-called digital natives – don’t realize how much this rubbish is a product of the internet. My grandparents lived through the “Blitz” during World War II in London with less panic than modern Americans feel about a tweet.

Right now the war and fear premiums in current oil prices are significant.

Crude-oil prices have risen by 40% just since the start of the war two weeks ago, and are nearly 50% higher than their average levels over the past 25 years. The U.S. Oil Fund USO a popular exchange-traded fund that bets on oil’s price, is nearly twice its price of mid-December.

The current panic also assumes that the Iranian regime will be able to keep disrupting the flow of tankers. A variety of factors, including politics and a herd mentality, make me wonder if the media are generally overestimating the resilience of the Iranian military and underestimating Israeli and the U.S. forces. It is not fanciful to suspect that Iranian capabilities are being degraded very quickly.

Whatever you think about the war, I’d be reluctant to bet against the Pentagon and the Israeli Defense Force.

Now let’s turn to the politics.

Donald Trump is going to do every single thing he can to get that oil price down, and quickly. Why? He has to. Otherwise the SAVE Act, even if he somehow gets it passed, isn’t going to save the midterms.

If you want to know why, check out this chart.

According to the Cook Report, U.S. Senate seats are potentially in play in 10 states this fall (excluding the 25 that are deemed “solid” for one party or the other). And according to the AAA, gasoline prices in those 10 states have risen between 19% and 32% just in the last month. In other words, the cost to voters of filling their tanks has gone up somewhere between a fifth and a third.

So it is hardly a surprise that the Trump administration is talking about using the U.S. Navy to escort tankers through the Strait of Hormuz, and allowing some Russian oil – supposedly just the stuff already at sea, if you want a good laugh – to be sold into Western markets.

And if insurance companies won’t insure oil tankers trying to get through the strait, the U.S. taxpayer will end up doing so.

And the administration will, if it has to, exhaust every other option to bring down oil prices as fast as possible. Because it has to.

Then, third, there are the economics of $100 oil.

It’s the oldest rule of the commodities markets: that the cure for high prices is high prices.

High prices stimulate producers to find more supplies, and consumers to cut consumption. With energy prices at these levels, more oil and gas will find its way to the market. The Saudis are already tapping desert pipelines to bypass the Strait of Hormuz. And spare me, politicians posturing about sanctions on Russian exports. How, exactly, are you planning to keep it from global markets? Are international inspectors going to scent all Russian oil and gas with lavender so it can be identified and shunned, like blood diamonds?

Every gallon will find its way to the world market.

Meanwhile, will people drive as much with gas at $3.60 a gallon as they did at $2.90? How? Will companies use as much energy now that it’s 60% more expensive? Or will they find ways to reduce waste and cut costs?

That depends on whether the CEO wants to see the value of his stock options go up or down, I guess. Hmm.

Oil and gasoline prices can’t sustain high levels because they are a tax on consumers, and if prices go high and stay there then the economy goes into a slowdown or recession – slashing energy consumption.

The oil shocks of 1973, 1979 and 1990 all triggered or deepened recessions. The oil shock of 2007-08 deepened the global financial crisis.

(The Russian invasion of Ukraine in 2022 didn’t trigger a recession because the federal government was spending so much money, and running such huge deficits, as part of the postpandemic recovery agenda.)

If you genuinely think oil is going to $150 a barrel, and gasoline to $5 a gallon, and will stay there, the play here probably isn’t to buy energy but to sell stocks – especially consumer stocks – and buy bonds.

It is a curious feature of this crisis that, so far, the rest of the stock market has reacted very little, while bonds have actually fallen as a result of inflation fears.

As of the last count, the S&P 500 SPY was just 4% from its record highs of earlier this year. The Russell 2000 RUT index of smaller companies (many of them loss-making and speculative) is down just 8%.

The market surely does not expect oil prices to stay high for long. If you are seriously bullish on oil prices even at $100 a barrel, you should presumably be bearish toward the rest of the stock market.

Or maybe the broader market just thinks that this crisis is going to pass pretty quickly, and that buying oil at these prices is a sucker’s bet.

-Brett Arends

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