Summary in Plain Language
The situation in the Middle East has escalated recently, with the traffic through the Strait of Hormuz, one of the world's most critical oil shipping routes, dropping to just a quarter of its pre-war levels. This has driven international oil prices up to over $90 per barrel, coinciding with the U.S. Labor Day holiday. As a result, local gasoline prices have reached record highs for the holiday, costing nearly $1 more per gallon than the same period last year. Previously, the market was generally optimistic, expecting the conflict to resolve quickly and oil prices to fall back to lower levels. However, now a group of top global investment institutions and industry leaders are stating that this surge in oil prices is not just a short-term geopolitical speculation. Over the past decade or so, there has been a shift away from investing in traditional energy sources, and the geopolitical landscape has become increasingly divided. Additionally, the massive debts of various countries are leading to the devaluation of their currencies. These factors have combined to trigger a bull market for tangible assets such as oil, gold, and agricultural products, which is far from over.
---
Detailed Explanation
1. Geopolitical factors are real, and oil shipping routes are severely impacted; there's no room for a quick drop in prices
Many people thought that the conflicts in the Middle East would be minor and that oil prices would return to around $70 within a couple of weeks. However, the latest data dispels this optimism: The weekly oil traffic through the Strait of Hormuz is now only one-fourth of what it was before the conflict. Saudi Arabia tried to create an alternative route by transporting oil from the eastern oil fields to the Red Sea via pipelines and then by sea, but the Houthi rebels in the Red Sea pose a constant threat of attack, making both routes unsafe. There is no other major oil export route that can replace the Strait of Hormuz on a global scale. Even if all parties declare a complete ceasefire and the shipping lanes are fully reopened, it will take at least four months for oil production to return to 80% of pre-war levels. Goldman Sachs has even predicted that the disruption could last until 2027. With oil prices stuck between $90 and $100, there are only two possible outcomes: either the conflict is completely resolved and prices drop to around $75, or the shipping lanes remain closed, pushing prices above $110. There is no middle ground for a moderate fluctuation; future price movements are likely to be quite significant.
2. High oil prices are directly affecting ordinary Americans' wallets, and inflation is likely to rebound
This rise in oil prices is not just a financial market phenomenon; it has a real impact on people's lives. Labor Day was traditionally a peak season for road trips in the U.S., but now the average price of gasoline is $4.15 per gallon, more than 30 cents higher than the previous record set in 2012. U.S. refineries are operating at 98% of their capacity, the highest rate since 2018, yet gasoline inventory remains below average. As a result, the U.S. government has temporarily exempted the Jones Act, which has been in effect for nearly a century, allowing foreign ships to transport fuel into the country due to a shortage of domestic vessels. Travel costs have also increased, with airfare on popular domestic routes rising by nearly 20% year-over-year. The Federal Reserve had managed to bring inflation down from around 9% to around 3%, but with these rising oil prices, the expected interest rate cuts are likely to be delayed.
3. The increase in oil prices is not solely due to the Middle East; past investments in traditional energy are the real long-term drivers
Many believe that the rise in oil prices is solely due to geopolitical conflicts. However, the trend of increasing oil prices was already in place long before the Middle East issues. Since 2014, there has been a global push for ESG (Environmental, Social, and Governance) investments, prompting institutions to divest from traditional energy projects and shift their funds to renewable energy and AI. This has created a significant investment gap in the traditional energy sector. Corey, former head of commodities at Goldman Sachs, calculated that after deducting all costs, debt repayments, and new project investments, the top seven energy companies globally have an available return on capital of only 15.5%, while the so-called "tech giants" have a return of just 2%. Companies in the AI and data center sectors are hardly making any profit. In other words, everyone is focusing on unproven AI concepts, while no one is willing to invest in oil production. The supply-demand gap for oil has already existed, and the Middle East conflict has merely exposed it.
4. Global investment logic has changed; paper assets are becoming less valuable, and a bull market for tangible assets has just begun
The traditional investment strategy of buying dollars and U.S. bonds as a hedge against risks no longer works. The U.S. is facing staggering levels of sovereign debt, with annual interest payments rising rapidly. Essentially, the government is diluting the debt by printing more money, which will weaken the long-term value of the dollar and U.S. bonds. Paper assets such as stocks and bonds can fail suddenly, but tangible assets like oil, gold, and food are essential for daily use, and their supply cannot be quickly increased. Even during an economic recession, people still need to eat, drive, and keep warm, so demand for these goods will not decrease significantly. There is even a notion in the market that Western governments are deliberately downplaying the real shortages of energy and agricultural products to avoid panic among the public. Experts believe that this cycle driven by tangible assets is just in its early stages, with much more growth ahead. Ordinary investors who allocate some of their assets to these tangible assets can effectively hedge against inflation and geopolitical risks.