As yet another day of Trumpian madness unfolds, we are not sure who wins the Doofus of the Day award – the Donald, again, or his unhinged Secy of the Treasury. As it happens, the latter was apparently making a run for the money earlier this morning with this doozy:
US Treasury Secretary Scott Bessent stated at a press conference today: “We will impose 100% tariffs on Chinese goods if they continue to buy Iranian energy products.” Chinese Foreign Minister Wang Yi stated: “We will continue to buy from Iran, whether you impose 100% or even 200% tariffs – I don’t care.”
Here’s the thing, Scottie. For the reasons we laid out in Part 1 and amplify below, your blockade ploy is already coming a cropper. Even the speculators in the oil pits have figured out that Iran is months – not days – from capitulation owing to your imaginary imminent shortages of cash, oil storage space or both. In turn, energy markets also realize this means the growing global bow wave of un-shipped oil will hit gargantuan proportions long before the mullahs cry Uncle.
Perhaps that’s why in the wee hours this AM the Brent futures price tagged exactly 2X the level it stood at when Bibi Netanyahu found his long sought “mark” in the Oval Office on February 28th.
For want of doubt, it’s also well to recall that last time Brent hit this level at the onset of the Russia/Ukraine disruption in the Black Sea region, the correlate of $120 + global crude oil was $5 gasoline at the pump in Flyover America.
But as we will show below, the Black Sea energy and commodity outages of February 2022 were just a warm-up. What will occur if the much more expansive Persian Gulf basin remains closed down much longer – as both the Donald and his loony tunes Secy of Treasury are now promising – will truly amount to the Mother of all Supply Shocks – and not just with regards to petroleum, either.
But as of 4AM Monday morning, anyway, the Donald was self-evidently still under the illusion that his purported no cash/no room in the tanks double-tap on Iran’s petroleum life line has already won the day. Hence came braggadocio that befits a 13-year old getting his first chest hairs.
Of course, you can say this is merely the Donald being the Donald, and that he’s just punking us, anyway. Then again, we do recall from personal experience how an earlier POTUS sent a message to a far more fearsome foe than today’s benighted Iranian theocracy with a GDP equal to, well, barely 1.3% of America’s.
To wit, Ronald Reagan sent Gorbachev a succinct but polite message that literally brought down the Iron Curtain, ended the truly evil Soviet Empire and thereby changed the course of history. And in a good way, too.
Moreover, upon the delivery of this historically pivotal message, President Reagan did not proceed to belittle Gorbachev – to say nothing of attempting to assassinate him. Instead, he met with him for honest negotiations four times – at the Reykjavik Summit (1986), the Washington Summit (1987), the Moscow Summit (1988) and a UN meeting in New York (1988) .
The rest was history, as they say.
Needless to say, Trump will go down in history, too, but for the very opposite of the Gipper’s statesmanship. Indeed, we’d say there is now at least a 50% probability that he will be the first president ever impeached, convicted and removed from office, and likely before next year’s April Fools Day, too.
There is no mystery as to why. The Donald started a war that anyone who knew anything about Iran knew could not be won by bombing. And that’s to say nothing of the Donald’s apparently anticipated quick win via a Maduro style snatch and grab of its leadership, albeit this time on a dead and gone basis all at once.
It was also one that anyone in their right mind knew could not be prosecuted with massive numbers of US boots on the ground. To do so would lead to a Gallipoli style slaughter of American forces within what is an IRGC garrison state. Yet he took the bait, anyway, because the Maduro snatch seemed easy and Bibi told him the Iranian regime would likewise collapse in a heartbeat.
It didn’t. Obviously and predictably. So now the Donald is stuck in a worse trap than Churchill faced at Dunkirk.
But what is on the line is not just 300,000 stranded troops, but the entire global economy. That is to say, if the SOH is not opened for normal traffic within a very few weeks, the fragile, hideously leveraged and speculation-ridden financial markets of the world will plunge into free-fall.
That’s because the world economy today is burdened with $350 trillion of public and private debt, representing nearly 3.5X global income. Accordingly, the world’s massive debt structure simply cannot handle a drastic stagflationary shock, which would radically disrupt cash flows to government, businesses and households alike.
Once the furniture starts breaking, however, and waves of panic selling ensue on the back of a renewed 18-year speculative bubble like none before, it will be Katy-bar-the-door time. Even the central banks will be powerless to arrest the implosion this time.
And yet and yet. The Donald is rolling the dice via a Hail Mary of virtually biblical aspect. That is, backed into a corner he is now attempting to run out the clock on his Iranian foes via a naval blockade strategy that is virtually guaranteed to fail. As we demonstrated in Part 1, the Iranians have upwards of $20 billion of cash coming in from already sold, shipped or delivered oil – outside of the reach of the demonstrably leaky blockade.
Likewise, even before they get creative and resourceful with unconventional expedients like oil storage in makeshift salt domes and mountain side caverns, the Iranians have upwards of 60 days of storage left in above ground tanks and Iranian-controlled vessels inside the SOH.
Accordingly, in what will surely prove to be one of the greatest strategic mis-steps of all time, the Donald is instructing government officials who surely know better to hunker down and wait for the Iranians to run out of cash and drown in crude oil with no place to go:
President Trump has instructed aides to prepare for an extended blockade of Iran, U.S. officials said, targeting the regime’s coffers in a high-risk bid to compel a nuclear capitulation Tehran has long refused.
In recent meetings, including a Monday discussion in the Situation Room, Trump opted to continue squeezing Iran’s economy and oil exports by preventing shipping to and from its ports. He assessed that his other options – resume bombing or walk away from the conflict – carried more risk than maintaining the blockade, officials said.
Alas, the global energy markets are going to run out of supply at even quasi-tolerable prices long before Iran’s remaining, increasingly hard line rulers, actually throw in the towel. For want of doubt, here is a carefully constructed Goldman Sachs analysis of the relentlessly rising bow wave of missing global liquid petroleum supplies.
Already, supply outages from the Persian Gulf have reduced global inventories by 870 million barrels. So if peace were to breakout next week – which surely is not going to happened – and the already badly damaged oil production and handling facilities throughout the Persian Gulf are rapidly brought back into normal production, the bow wave of missing supply will still reach epic magnitudes.
In the exercise below, Goldman assumed that Persian Gulf exports, which today stand at barely 35% of normal, would reach 50% of pre-war levels one-month after a settlement, 60% after two months and 70% after three months. Of course, given the damage and disorder up and down the Gulf from Iraq and Kuwait to Saudi Arabia, the UAE, Bahrain and Qatar – to say nothing of #2 Gulf producer, Iran – there is probably scant few oil petroleum experts who would not guffaw loudly at the do-ability of this presumed steep rate of recovery.
Still, after three months of return to production starting next week under the Goldman scenario, the 105 million barrel per day global market would be short by a cumulative total of damn near 1.4 billion barrels of oil!
And if, as is likely, the negotiations drag on and production and shipping resumes on a more sloppy, start and stop basis, the shortfall would readily hit at least 1.6 billion barrels after six months from today.
That is, at a point one week before the mid-term elections!
To be sure, under normal conditions there appears to be a pretty large global inventory of liquid petroleum reserves on paper – upwards of 8.2 billion barrels as of the end of 2025. However, when you peak beneath the hood, that’s not nearly the cushion it might seem to be.
To start with, the most flexible and “liquid” part of the global inventory is the 2.0 billion barrels of seaborne “oil on the blue water” in several thousand tankers of all shapes and sizes. But a large share of the seaborne global inventory is accounted for by supplies originating in the Persian Gulf because it is far more distant from end markets navigation-time wise than is production from the USA, North Sea or even Russia.
For instance, 30% of seaborne inventories of crude oil and 35% of naphtha inventories normally originate through the Strait of Hormuz. What this means, of course, is that more than half of the normal seaborne inventories have already been depleted by tankers unloading in end markets, which aren’t being replaced by new shipments out of the Persian Gulf.
Likewise, the 2.5 billion of government managed or financed so-called “strategic petroleum” reserves are not what they are cracked up to be, either. Already, 400 million barrels of this worldwide reserve total has been released under an IEA plan, and is flowing into global markets, including 172 million barrels from the US SPR.
The problem is, threatening China with 100% tariffs, as Secy Bessent did this morning, is not likely to encourage Beijing’s cooperation. At the same time, the 24o million left in the USA is mostly not available at all – since there is an operational and safety minimum in the salt caverns at about 150 million barrels.
Stated differently, at the normal level before Joe Biden went to town using the SPR as a political weapon to tamp down the pump price of gas, there was about 640 million barrels in the US reserve. After the current IEA release, 400 million barrels will have been used up by two president playing politics, meaning that as a practical matter only 90 million barrels would be left. And that’s even if the US wanted to go 100% naked with respect to any future emergencies.
Then again, what remains available as a practical matter in the US SPR amounts to about 21 hours of global petroleum consumption, anyway.
And, as for the rest of the worldwide strategic inventory, it’s mainly in Japan (180 million barrels), which won’t easily give it up owing to its 100% import dependence; and the European Union (140 million barrels), which has just made itself more dependent on the Persian Gulf supplies than ever before after ixnaying 100% of its former oil and gas supplies from Russia.
What this means, as a practical matter, is that the world has already burned through its normal seaborne inventory cushion and most of its available government controlled strategic reserves outside of China.
So what is actually being drawn down at upwards of 15-20 million barrels per day is the world’s working inventories of commercial storage. But, no, these inventories are not there for a rainy day or to provide cushion for the adverse supply impacts of stupidities emanating from the halls of government.
To the contrary, these 3.6 billion barrels, in fact, are spread out from here to kingdom come in working storage tanks at refineries, distribution centers, retail outlets and rolling stock – trains, planes, trucks and cars – on the highways, byways and skies of the global economy.
Once you start draining these working inventories, mayhem will break out in every direction as the hoarding instinct takes control of normal economic activity. And the risk of drastic inventory dislocations due to hoarding is now especially severe because more or less the world’s industrial economy has migrated during the last several decades to a JIT-inventory (just-in-time) management model – including for fuel and energy in all of its different modalities.
Indeed, upwards of half of global commercial petroleum inventory is comprised of OECD commercial crude oil stocks. As is shown in the chart below, once those stocks – which currently stand at about 1.0 billion barrels drop below 900 million, the system will rapidly plunge into operational dysfunction due to hoarding, rolling spot outages and infinite feedback loops of self-fueling disorder, as he world learned in 2006-2009,
Moreover, the very real prospect of rupturing arteries from one end of the daily economy to the other owing to fuel outages wouldn’t be the half of it, as we will further address in Part 3. For instance, soaring fertilizer prices are already assuring the weakest crop yields in decades next fall, and yet food and feed are among the most price inelastic of all commodities.
In short, the Donald backed himself into a corner and is now making the worst possible bet. The resulting economic dislocations and stagflationary eruptions just ahead are surely going to be – to use his favorite phrase – like nothing we have ever seen before.
David Stockman was a two-term Congressman from Michigan. He was also the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street. He’s the author of three books, The Triumph of Politics: Why the Reagan Revolution Failed, The Great Deformation: The Corruption of Capitalism in America, TRUMPED! A Nation on the Brink of Ruin… And How to Bring It Back, and the recently released Great Money Bubble: Protect Yourself From The Coming Inflation Storm. He also is founder of David Stockman’s Contra Corner and David Stockman’s Bubble Finance Trader.No. They aren’t. He made it up. Every damn bit of it.
