The Podcast of the Lotus Eaters - PREVIEW： Brokenomics ｜ Why isn't oil $200 a barrel？

00:00:00.000 Hello and welcome to Brokernomics. Now, in this episode I thought I would try and answer 0.87

00:00:19.400 a question that I've been asking myself recently, which is why is oil not $200 a barrel? Or

00:00:27.360 at least 150 why why is oil not much higher than the you know the the 100 110 that it's kind of

00:00:36.460 floating around at the moment and you know you can't really get more perfect conditions

00:00:43.700 than we've currently got for very high oil you've got you've got ukrainian uh drones are blowing up

00:00:51.720 uh russian uh oil refineries um at quite a rate and you've got the strait of hormuz closed

00:00:58.680 and those conditions should be optimal for uh you know economy destroying oil prices now they

00:01:07.540 now they are reasonably high but they're nowhere near as high as you would expect given the sort

00:01:12.480 of setup conditions that we've got and you've got to remember before the before the war uh the

00:01:17.900 Hormuz, you know, the Iran war, you had about 15 million barrels of oil, well, 15 million barrels

00:01:26.880 of crude and about 5 million barrels a day of refined products going through the strait. So a

00:01:35.000 total of, you know, 20 million barrels a day. And about 80% of that went on to Asia and only

00:01:43.480 somewhere in the region of you know on a good day three and a half to five million barrels is

00:01:50.320 actually getting through so you're left with even on a good day you're left with a shortage of 15

00:01:56.660 millions 15 million barrels of oil a day and some days you get you get less than that and if you

00:02:03.420 were told you know if you told me beforehand the world's most important oil checkpoint is going to

00:02:09.200 be basically closed for several months at the same time as ukrainian drones are blowing up

00:02:16.260 russian oil refineries 150 to 200 million barrels sorry 250 uh 150 to 200 dollars per barrel is is

00:02:27.440 not i would have suggested an unreasonable expectation but okay i mean some mitigating

00:02:34.400 factors we didn't actually lose the full 20 the system did adjust to a certain extent so

00:02:41.140 the the bypass has you know the sort of the blockade has been bypassed to a certain extent

00:02:46.460 and some flows get thrown no no salary oil gets through but some of the other uh producers do get

00:02:54.180 through uh and there has been a bit of a rise on sort of non-golf production something

00:02:58.900 there has been inventory drawdown and i think we need to look at that

00:03:04.400 And there's been some substitution going on.

00:03:08.520 But the IEA estimates have been completely blown out of the water.

00:03:16.480 So global oil production in, say, August was 100 million barrels a day.

00:03:22.280 And that's with at least 10 million barrels of golf production, which is effectively shut in.

00:03:28.420 And the IEA is now expecting that global oil supply to fall by 5.7 million barrels a day.

00:03:39.080 Where is the difference here?

00:03:41.540 And are there any sort of deeper lessons of this?

00:03:44.480 Well, one of the biggest adjustment factors has been inventories have been drawn down quite significantly.

00:03:51.720 That, of course, can only go on for so long.

00:03:53.700 So global inventories are down about 500 million barrels since this whole thing started.

00:03:59.840 That's a lot of barrels.

00:04:01.100 That's half a billion barrels of inventories around the world have been drawn down.

00:04:05.860 And in August alone, it was 95 million barrels of reserves got drew down.

00:04:13.800 So we're looking at a draw rate from reserves of about 3 million barrels a day, quite a bit.

00:04:19.940 And so we're kind of trading an acute shortage today for a declining resilience tomorrow.

00:04:29.320 That's kind of effectively, that's probably the biggest factor in what's going on at the moment.

00:04:34.160 And before the war, the IEA were expecting that in this year, 2026, they're expecting oil demand to increase by about 850,000 barrels.

00:04:45.800 So the best part of a million barrels would be used per day.

00:04:51.080 And the supply was, you know, therefore expected to be a bit of an excess supply.

00:04:57.600 So we did start the Iran war with surplus supplies and unusually high inventories,

00:05:04.940 which is actually a very valuable set of conditions to start this off in the first place.

00:05:09.100 and demand had been expected to grow by about 850,000, almost a million barrels per day.

00:05:21.200 And instead, what we've got now is a reduction in oil of two and a half million barrels a day.

00:05:27.080 Or to look at it another way, three to three and a half million barrels a day difference,

00:05:32.120 depending on what the whole set of economic assumptions built on going into this.

00:05:36.820 So that is a pretty extraordinary difference.

00:05:39.100 So we've got to ask, okay, what actually got destroyed?

00:05:42.400 Where is this pain being felt?

00:05:44.800 Because you might hear, okay, there's restrictions on oil,

00:05:49.100 and that means that everybody's going to stop driving.

00:05:50.920 That isn't actually what happened.

00:05:53.140 Actually, the biggest damage, the demand destruction that occurred,

00:05:58.100 was petrochemicals, and specifically in Asia.

00:06:03.040 And a lot of the oil was going to Asia,

00:06:05.260 and it was being used for synthetic fibres, plastics, fertilisers, resins, solvents, industrial

00:06:12.840 feedstocks, that kind of stuff. And actually, it's really that last one, the industrial feedstocks,

00:06:17.760 which has really borne the brunt of all of this. So pre-war, petrochemical feedstocks were expected

00:06:22.980 to provide about half of all of that demand growth that I talked about. So the additional

00:06:29.160 two and a half million bowels, that was expected to go into mainly petrochemical feedstocks.

00:06:33.700 And the IEA is now saying that the concentration,

00:06:38.800 the demand destruction has occurred particularly in that area,

00:06:42.580 the feedstocks.

00:06:45.420 Because essentially, in this actual process,

00:06:49.100 feedstocks can be shut down.

00:06:54.060 They're relatively elastic to price response,

00:06:57.080 whereas an ambulance is not.

00:06:59.200 You're not going to not fill up your ambulance

00:07:01.060 or your, you know, your work truck or whatever it is. Aviation has done a bit of work on this as

00:07:06.320 well. So, I mean, Middle East was effectively, the airlines were effectively closed for a longer

00:07:11.980 period of time. Fuel has got more expensive, fewer flights. So that knocks out a bit of it

00:07:17.420 as well. LPG, liquid propane gas, cooking, heating, petrochemicals, all that kind of stuff.

00:07:23.680 Industrial customers are far more likely to ration than households. Households will basically just

00:07:28.920 bear the cost and behave pretty much how they did before. Industrial customers are watching the

00:07:35.560 costs in and their margins on a regular basis. And therefore, they're basically just cutting back

00:07:39.500 on this stuff. And diesel is also another sensitive point. And we have to talk about that

00:07:43.240 more, particularly around Trump's response to high diesel prices in the US, which I think have

00:07:49.740 reached about $6 a gallon at the moment. And they're going to be a big issue for the midterm

00:07:54.760 for them but diesel is crucial for the western economy you know trucking uh agriculture mining

00:08:00.600 construction industry generators all of that kind of stuff diesel and gasoline if we want to lump

00:08:07.020 them together that's about 30 of the global oil demand and the u.s um benchmark diesel exceeded

00:08:16.740 um about two hundred dollars per barrel so we are getting those numbers in particular areas

00:08:24.200 but we're not getting it across the board so effectively you know the the the cost of diesel

00:08:31.040 is is about twice what it was pre in the pre-war period so the answer to the answer is less about

00:08:38.580 why is an oil two hundred dollars a barrel across everything at the moment it's more that some of

00:08:45.340 the oil that actually matters to the industry already is at that level and the brent factor

00:08:51.180 because there isn't one there isn't one price for oil there's there's there's hundreds of prices of

00:08:54.940 oils depending on uh usage uh type uh delivery speed of delivery source all that there's many

00:09:02.580 different prices of oil and brent does kind of uh mask a lot of that but brent is masking a pretty

00:09:09.680 enormous refinery and product crisis going on looking at this in terms of the midterm elections

00:09:16.180 coming up is it possible that trump might just decide that because um he's got an election to

00:09:22.440 win he's going to need to keep diesel in the u.s and the d and the u.s could do that because the

00:09:28.260 you know u.s distilleries they kick out you know about one and a half maybe getting on for two

00:09:34.760 million barrels a day um and and the u.s domestic consumption sorry no the u.s exports uh about one

00:09:43.280 and a half two million barrels of diesel a day but its domestic consumption is about three and

00:09:49.260 a half million barrels today so if it were to stop exporting you instantly get around 45 percent of

00:09:57.540 the domestic demand added back which as you can imagine would have quite an effect on price if

00:10:03.240 able to come back with diesel at six dollars per gallon that's got to be tempting i'll tell you why

00:10:11.020 he hasn't done it the reason why he hasn't stopped the export of oil at this point is because if he

00:10:17.580 does he's going to cause price of diesel around the west of the world to absolutely skyrocket

00:10:22.720 and that gives him two problems the first problem is that the allies are going to get very annoyed

00:10:29.160 with this because they're going to say well look you're you're backing effectively two wars that

00:10:33.020 cutting off our oil supply you've got your proxy war against russia um in ukraine and that's cutting

00:10:38.660 off one source of oil you've got your war against iran which is cutting off um another source of

00:10:44.280 oil and now our diesel prices have absolutely gone through the roof because you've stopped

00:10:48.900 the export of of of diesel um but probably the more significant factor is because that would then

00:10:56.680 basically feed the bottom of the chain for all of the allies i mean energy costs feed into everything

00:11:01.900 because it's kind of the bottom layer of the economy.

00:11:04.540 Its energy is a multiplier effect on everything else.

00:11:07.120 It would cause prices around the rest of the world

00:11:09.460 with US trading partners to rise.

00:11:12.260 And the administration has worked out

00:11:15.320 that actually it would actually end up costing them a bit more in the end

00:11:18.820 because import prices would rise because US is not an island.

00:11:23.940 It doesn't produce everything it wants locally.

00:11:25.740 It doesn't produce everything that it needs within its own boundaries.

00:11:28.860 If it did, it could cut off diesel from being exported.

00:11:31.900 But because it doesn't do that, it would end up paying at least as much, if not more, by stopping some fuel coming through to the rest of the world, which is keeping a lid on excess price rises.

00:11:46.440 And so the US consumer isn't actually any worse off net by allowing some diesel to be exported.

00:11:54.320 Nevertheless, you've got to think, haven't you,

00:11:56.460 that with the midterms drawing ever closer,

00:11:59.720 at some point he might actually decide to pull the trigger.

00:12:03.220 And it might work at first because you might see in the coming weeks

00:12:07.440 a bit of a drop in the diesel price,

00:12:09.620 which will look good when people go to the polls.

00:12:12.600 And then in the weeks following that, their import prices will go up

00:12:16.440 and then they'll be back where they started.

00:12:18.540 But it bought him a couple of key weeks while that transition was playing out.

00:12:22.280 so basically what we've got to talk about is demand destruction

00:12:25.800 because demand destruction is occurring oil is not significantly higher largely because

00:12:34.460 everybody who's got a choice not to use oil everybody with a with a marginal industrial

00:12:40.600 process has already effectively been priced out so the bad formulation is well demand destruction

00:12:45.920 has prevented the oil shock damaging the destruction not quite as simple as that it's

00:12:53.040 more that demand destruction is one of the ways that the oil shop has damaged the damage the

00:12:59.400 economy so factories close oil demand falls and if flights are cancelled well jet demand

00:13:06.880 or jet fuel demand falls obviously and if construction is abandoned you're going to

00:13:14.020 you use less diesel. And if trucking jobs become unviable, you use less diesel. And if consumers

00:13:19.580 don't make a journey, you use less diesel. So demand falls towards the available supply.

00:13:27.460 So that is really the mechanism that is stopping prices from getting completely out of hand.

00:13:32.240 So the economic pain is already occurring. It's less visible if you're currently employed.

00:13:39.440 it's much more visible if you are trying to get a job because it is new hires expansion

00:13:46.940 that gets impacted first it is existing uh jobs and in existing industrial processes that get

00:13:55.400 turned off in in the second order of things and that's probably what we are going to be approaching

00:14:00.720 in the not too distant future but it also raises for me a quite interesting question right because

00:14:05.840 price of oil goes up, people say, okay, well, I can't afford to use as much oil then.

00:14:13.440 And so the amount of oil getting used goes down to match the price. That is kind of demand

00:14:18.940 destruction working as you would expect it to. Because oil has a market clearing price.

00:14:26.420 So does capital. Capital also has a market clearing price. We just call it the interest

00:14:31.700 rate. The price of money is the interest rate. And the other thing that's going on at the moment

00:14:37.720 is that interest rates across the G7 in America, I mean everywhere really,

00:14:43.160 the interest rates are being pushed up. So the demand for capital is exceeding

00:14:49.760 the supply of savings, effectively. Interest rates, therefore, have to rise

00:14:57.000 to net off one against the other. And that should mean that the same mechanism that I've just

00:15:04.040 talked about with oil should come into play, should it not? If we are going to increase the

00:15:10.620 cost of capital, well, a whole bunch of borrowing becomes unviable, which means a whole bunch of

00:15:19.160 marginal projects therefore become uneconomical so you don't finish that construction you don't

00:15:27.440 expand your factory you don't hire additional jobs you don't you don't do many of the things

00:15:31.220 on borrowing that you could have done because you think okay well i think i can clear a nine

00:15:37.100 percent return if i if i expand my factory on whatever it will cost and i need to take off a

00:15:42.920 bit of a margin for safety uh and and therefore if i'm if i can borrow at two percent well i'm

00:15:48.120 going to borrow at 2% and then I'm going to save the difference. Well, what if you think your

00:15:54.400 project might yield 6% and borrowing costs are at 5.5% or even 6%? It wipes out your margin and

00:16:03.260 therefore you're not going to do the thing or you're not going to make the hires, you're not

00:16:06.860 going to expand the economy, you're not going to do all of those things that would lead to a

00:16:11.880 stronger economy and more jobs and more taxes being paid and all that kind of thing. So the

00:16:16.480 The same mechanism of demand destruction should occur with money as happens with oil leading

00:16:24.700 to a market clearing rate.

00:16:25.980 That's the basic sort of argument here.

00:16:28.780 Global savings are finite.

00:16:31.040 Global growth in savings have weakened.

00:16:34.720 We've got a problem, haven't we?

00:16:35.900 And the problem is, is that the government does not respond to demand destruction.

00:16:41.920 the government doesn't say okay the cost of my borrowing has gone up from well effectively zero

00:16:50.880 not so many years ago i mean we're only talking sort of pre-covid era um so yeah five years ago

00:16:58.060 five six seven years ago governments could effectively borrow at zero and of course what

00:17:04.860 do they do with that did they did they use that as an opportunity to refinance their debt over

00:17:09.980 a hundred years. To be fair, Trump did propose doing that. Did they say, okay, we're going to

00:17:16.380 intelligently invest? Or did they basically make promises to buy votes in order to use all of that

00:17:26.500 surplus? And now the cost of money is high. What government is certainly not doing is saying,

00:17:32.920 okay, well, it's no longer viable.

00:17:37.340 Show me the return we're getting on Medicare or Medicaid.

00:17:41.080 And if it doesn't clear the 6% borrowing cost,

00:17:43.260 we're not going to do it.

00:17:43.980 It doesn't work like that with government.

00:17:45.600 They don't respond to the same demand destruction

00:17:49.240 price signaling that basically any other good should.

00:17:55.360 And the current US 10-year is about floating

00:17:57.980 around the 5% mark.

00:17:59.480 It's quite often going over 5%.

00:18:01.540 And it's trending higher than that, which is the highest since, well, pre-GFC, so 2007.

00:18:13.340 So really, the interesting question there is why a rate is, well, it's less why are rates high,

00:18:21.940 and it's more why should capital still cost 3% in a world which is desperate for trillions of dollars of capital?

00:18:29.820 well it's not it's going up the government government can afford three percent it can't

00:18:37.220 afford five percent and it's not going to respond to the price incentives it's not going to respond

00:18:42.360 to the fact that money is more expensive it's not going to cut military spending it's not going to

00:18:47.620 cut medicare medicaid or in the uk it's not going to cut pensions welfare in the nhs as the price

00:18:53.840 of government gets more expensive, it refuses to respond to the price signal the way that

00:19:01.080 Chinese oil users and petrochemical feedstock producers are saying, okay, well, this is

00:19:06.940 no longer viable and we're going to pull it back.

00:19:09.060 Actually, they're just going to carry on because many of their commitments have been written

00:19:12.320 into law.

00:19:14.180 You will provide this amount of Medicare or Medicaid or whatever else.

00:19:19.160 Mandated spending makes up a huge proportion of the US system and also the UK system.

00:19:23.840 So actually, maybe 6%, and I know the UK and US governments don't like the fact that the long end of the curve is now at about 6%, but that probably actually is the natural clearing price of money, of capital.

00:19:40.540 And the equilibrium rates have moved materially upwards, especially at the long end, long-term money.

00:19:46.860 So if the government wants to borrow money at 20, 30 years, that's moved up materially.

00:19:54.520 So why would the natural price of capital still be rising?

00:19:57.960 And this is where it starts to get quite dark indeed for the government.

00:20:02.760 You see, because I'm sticking mainly to the US government. 0.80

00:20:07.060 this is all true if you live in any g7 country this is this is going to be true for you but it's

00:20:11.520 just it's just more pertinent in the u.s so i'll speak about the u.s um and then you can extrapolate

00:20:16.460 out the same principles going to apply in whatever g7 country you're living in but the u.s government

00:20:21.400 is is running a deficit of about two trillion dollars a year so it's a big number and they need

00:20:28.400 to uh monetize that every year they need they need to borrow that that two trillion and in addition

00:20:35.260 they've got a huge stock of previous borrowing that has matured and now needs to be rolled over

00:20:41.580 into fresh issuance um except this time it's not going to be at the zero or maybe two percent of

00:20:48.120 when the you know the when the five or the ten year bond was was originally sold um it's now

00:20:54.100 upwards is now at the six percent so it's adding continuously to the deficit because now higher

00:20:59.640 interest payments need to be made okay and the competing case is is like i say where it gets

00:21:05.080 really fascinating. Because you now have AI data centers, the chip rollout, and the electrical

00:21:14.060 generation grids. Defense is another big one. So Germany is getting back into defense big. The UK

00:21:20.320 is starting to realize that it might actually need to have a Royal Navy and an army and all

00:21:25.220 the rest of it. I mean, just the hyperscalers alone in their data centers is an enormous

00:21:31.980 competing cost of capital if you enjoyed that content and of course you did because you are

00:21:38.420 a smart person then why don't you go over to lotus eaters.com where you can watch the whole

00:21:43.460 episode for as little as five pounds a month which really is not much money at all and you get loads

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The Podcast of the Lotus Eaters - September 22, 2026

PREVIEW： Brokenomics ｜ Why isn't oil $200 a barrel？

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