"Oil is the key risk—since the early 1980s, geopolitical oil disruptions have become relatively short term in nature. Even the Gulf War didn’t keep oil prices high for more than a few months.
...If there is going to be a problem, it will come from hoarding. Under conditions of supply uncertainty, consumers will hold oil for precautionary purposes, driving up demand and prices. If the uncertainty is high enough, it can lead to excessive price increases, well beyond what inventory levels would suggest.
...The West has several tools available to dampen hoarding activity. First, the OECD nations and China have strategic reserves which, in theory, can be used to distribute supply globally to dampen hoarding. Second, the rise of U.S. shale production has created an important supply buffer outside the Middle East, where the vast majority of OPEC’s excess oil capacity resides. These may be enough to prevent hoarding. However, there is potential that these two factors may fail to prevent the hoarding instinct. First, the strategic reserves work because in a crisis, the OECD, through the IEA, would take control of national strategic reserves; in other words, the IEA could demand the U.S. sell oil to Panama from the U.S. SPR. This program has never actually been executed, but in the current nationalist environment, we think the odds of U.S. taxpayer provided oil being sold outside the U.S. to prevent hoarding in Central America is extremely unlikely. Second, the shale oil supply only dampens hoarding if it is available for export. In the case of a supply emergency, the temptation to close off American oil exports will be very high. Thus, WTI prices might stay low relative to world prices, but global prices, represented by Brent, might soar. The potential for oil prices disrupting global economic growth is probably as high now as it was in the 1970s."
(Daily Comment dated 01/06/20 by by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez with Confluence Investment Management LLC)
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