The US stock market is closed for labor day but that didn’t stop a major rally in WTI Crude. Oil rallied to intra-day highs jumping from $87 per barrel to $90.50 per barrel on the announcements coming out of Russia that gas supplies will be halted to Europe until Western sanctions on Russia are removed. This coming just a few days after Russia’s number one oil producer Gazprom announced a shutdown of the Nord Stream pipeline, giving no timetable for the pipeline to re-open gas flows to Germany and the rest of Europe. See the following taken from a news article in The Guardian:
This is going to put even more upward pressure on UK oil prices, which have been outpacing WTI Crude prices for quite some time now. Europe is likely to soon be experiencing a complete energy crisis, and the ECB (European Central Bank) is now facing a crossroads between tightening up its interest rate policy to combat inflation while trying to balance a very weakening European economy. The Federal Reserve is facing the same dilemma, but the ECB is now clearly in a deeper hole than the Fed is, at least for the moment.
Part of the problem with inflation is that it burdens the economy by weakening the consumer. Now that Europeans are coping with ever-increasing oil prices, they no longer have the disposable income available to continue to spend on discretionary items. This hurts businesses across many different sectors, and since one person’s spending is another person’s income, the chances of a severe recession across Europe are getting much higher. Inflation has caused for the average European’s REAL income to decline, which means they have less money to spend in the economy, causing a cascading effect which will eventually lower incomes for most of the middle class.
Since the ECB is responsible for the monetary policy of artificially low interest rates and QE, they are the most to blame for Europe’s inflation nightmares. However, oil is a story of its own. The extremely low supply of oil burdening the global economy will continue to exist for years, if not an entire decade. Making matters worse, OPEC announced unexpected production cuts this morning, helping to continue to bolster oil prices on commodities exchanges.
I have mentioned this before, but it is not the United States or the Western world that has the biggest sanctioning powers on the global stage. Instead, it is the nations with the most productive economies that create the output of goods that the world relies on. Sure, the US can throw its weight around as long as the US Dollar maintains its global reserve currency status, but that status is becoming jeopardized in the modern world of globalism. It may be tomorrow, it may be five years from now. One day, the US dollar will lose its status as the world’s reserve currency. There have been a number of other reserve currencies prior to the rise of the dollar, and none of those were able to sustain their reserve status either. Nations that capture the privilege of having the world’s reserve currency eventually abuse the privilege with excess money printing, as a means of increasing their trade deficits to allow for their citizens to live above their means of production, on the rest of the world’s dime.
We even saw the US dollar being used as a weapon at the start of the Russia/Ukraine conflict, when the Biden administration led a well-supported worldly attack on Russia administratively by placing sanctions that were aimed at crushing the Russian Ruble and the Russian economy altogether. Now, the tables have turned.
Russia is now using its durable competitive advantage to produce oil and natural gas to sanction Europe as we head into the winter months. While the West is not as dependent on Russian oil as the bulk of the European nations are, higher prices in Europe will have a massive effect on European export prices, and thus will create more upward pressure on good prices for Americans.
We should also note that there seems to be an underlying coalition being formed between Russia, China and India. Russia is not a sizeable enough economy or nation to have a grip of the direction of the world on its own, but China sure is, and India is not far behind. Altogether, they are trying to drive a new world order, as Ray Dalio has put it.
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