Ep 181 Weekly Roundup: Iran War Could Bring $40 Oil

Oil prices are in freefall and could keep going to $40 a barrel, which implies $2.

Gasoline, maybe we should close the Hormuz more often.

With the warranty run petering out, oil prices are crashing almost as fast as they rose, going from $105 a barrel six weeks ago to just over $70.

On West Texas crude, that's barely above the 67 when the war started.

And prediction market Kalshi is now projecting $60 oil by the end of the year, seven bucks below when the war started.

More important, apparently the war has torn apart OPEC with major members threatening to leave.

One already has, which matters because OPEC breaking could take oil down into the 40s.

So OPEC started the 1960s explicitly to keep oil prices high by cartelizing production, meaning they intentionally pump less oil to create shortages that keep prices high.

Like any cartel, this is tricky since every country wants to cheat and pump extra, and Saudi Arabia was the enforcer.

The problem isn't the 1960s anymore in two big ways.

Oil production in non-OPEC countries soared, And while OPEC members never liked each other very much, they like each other a lot less after four months bombing each other.

So when OPEC started, it was roughly 80% of world oil exports.

Before the Iran war, that had fallen to just over half.

And since the war, production jumped by millions of barrels in the U.S., Canada, Brazil, Kazakhstan, meaning OPEC is now well below half.

That's a problem because it means going forward, when OPEC cuts production, it's not strangling the world, it's simply handing the money to Americans, Canadians, Russians, and Kazakhstanis.

And that brings us to the political problem, the way Saudi behaved during the war, and now that the war is over.

In short, Saudi has a pipeline to the Red Sea, which goes around the Strait of Hormuz that Iran keeps bombing, meaning they could get a lot of oil, roughly half, and keep making money.

But members like Kuwait, Iraq, and Bahrain are all trapped in the Gulf.

At the mercy of Iran, they could not sell anything.

This left billion-dollar holes in their budgets, Now that the war is over, they want Saudi to give them extra quota to make up for it.

So Iraq wants a 50% hike.

Meanwhile, one of the biggest surprises of the war is China slashed oil demand, probably because a lot of factories are working on razor-thin margins, so it was cheaper to just shut down.

Now, Saudi's afraid that could be permanent, meaning they'd be letting OPEC pump hard into a dead market, which would crash oil prices.

In short, non-OPEC production and Chinese demand are creating an oil glut, toss in 50% quota hikes, and that glut becomes an ocean.

So what's next? When the smoke clears on Iran, the most important consequence could be the 60-year U.S.