Is This The Oil SHOCK That BREAKS The Economy?

0:00Hello, everyone. The Iran conflict continues as oil prices surge higher, and that begs the most important question in finance right now. Will higher oil prices create destructive high inflation in the American economy? We're going to answer that question today. We're live today from the desk of Anthony Pompliano.

0:24out. Before we get into today's episode, I need your help. We currently have 44 ,771 people who've hit the subscribe button, but majority of you that watch this video, you're not subscribed. So hit the subscribe button and let's get into today's conversation. All right, ladies and gentlemen, the oil market is causing havoc in financial markets. Everyone is freaking out. No one knows what's happening. Too many people think that the world's ending. The doomsday predictors are out in full force. But before we get into what I think will happen and why I think the doomsday predictors are wrong, let's review how we got here.

0:57Everyone was celebrating back in January this year. Energy prices were falling. Gas prices at the pump, they had fallen more than 3 % in the month. Gas prices were down over 7.5 % in the trailing year, and that was providing much needed relief to the consumer. But all of that has quickly reversed over the last month or so. Oil's up more than 60 % in the last month. It's mainly driven by a 42 % gain in oil over the last week. Gas prices have rocketed more than 14 % higher during the last seven days. And that brings the average price per gallon to more than$3.40 nationally. Now, it's no secret that the root cause of these price increases is the US-Israel tax on Iran.

1:37Iran produces between three and a half and four million barrels of oil per day. And that means that the country is responsible for about 4 % of total global oil production. Now, 4 % may sound small, but Iran is the sixth largest oil producing country in the world. They're on par with China's oil production output. And so when the US and Israel decided over the weekend to broaden their offensive from only military targets to now also including successful strikes on energy infrastructure and oil depots, oil opened higher last night, as you would expect. And normally we would be talking about$120 oil price this morning.

2:10But the G7 countries quickly addressed the issue and they announced that they were prepared to release 400 million barrels of oil into the global supply. Now this immediate and drastic response of increasing supply has had a cooling effect on the oil market over the last 24 hours. Rather than waste time trying to predict the future of oil prices though, I wanna answer a single question for you. Will higher oil prices create destructive high inflation in the American economy? I think this is the single question that everyone wants an answer to. And to answer this question, we have to understand the relationship between oil prices and inflation.

2:44Thankfully, the World Bank published an analysis two years ago that examined the main drivers of global inflation. In the piece, they wrote the following. Oil price shocks were the main drivers of variation in global inflation. For instance, following a positive oil price shock of around 10%, global inflation increases by 0.35 percentage points and 0.55 percentage points within three years. In addition, oil prices and global demand shocks were the main drivers of movements in global inflation around every single global recession since 1970, 75, 82, 91, 2009, and 2020. Now this World Bank analysis would suggest that inflation is going much higher, considering oil is up recently much more than 10%.

3:25But maybe there's more to the story. I think so. So let's keep investigating here. The Federal Reserve tends to believe that oil prices can have a big impact on domestic inflation, not just global. The central bank wrote a blog post titled does oil drive inflation? And they explained the relationship between oil prices and domestic inflation. They said that there's a strong positive relationship between oil prices and PPI. That is higher oil prices are associated with higher producer prices and vice versa. Now, in contrast, they say there's a positive, but much weaker relationship between oil prices and consumer inflation.

4:00That correlation is only 0.27, which is lower than the producer prices. So the Fed acknowledges a significantly weaker relationship between oil prices and consumer inflation. And that brings me to a very important point. If we learned one thing from 2025, it is that the economy is much more resilient than you think and high inflation can really only come from insane government spending. So in addition, the current deflationary forces, tariffs, deportations, AI, and robotics, they are a formidable force that likely has a much bigger impact on consumer inflation than oil prices. Let's take, for example, Truflation's data.

4:35Truflation shows that U.S. housing is already in deflation. It's down 1.5 % over the last 12 months. And housing is as much as 35 % of the government's CPI metric. So energy is only closer to 4 or 5 % of the CPI calculation. So what happens in the housing market is significantly more important than what happens in the energy market. And I explained how this works to CNBC's Morgan Brennan this morning.

4:58Anthony Pompliano:Take a listen. If you look at inflation expectations, people have been saying that we were going to get sky high inflation because of the tariffs. And I was very loud about the fact that we were not going to get that the tariffs were going to be deflationary. Now, if you look over the last year or so, what we've seen is tariffs are deflationary, deportations are deflationary, AI is deflationary, and robotics are deflationary. And we see this happening throughout the economy. And so the big risk right now is still deflation, not inflation in the U.S. economy. And I understand that oil has spiked in the short term and people are going to freak out about that.

5:26Anthony Pompliano:This has been going on for eight days, this Operation Epic Fury. And so let's say that it ends in the next two or three weeks. It would have been a short-term impact to oil prices. And the deflationary nature of what's happening in the economy is still a much, much bigger concern than a short-term oil impact. And I think what people also forget is that take housing as an example. The government is still saying that housing prices are growing. Truflation, which is a real-time measurement, is saying that housing is in deflation already. It's down 1.5 % over the last 12 months. If that is true, housing is a much bigger input into the CPI calculation than, let's say, oil or energy is at around 5%.

5:58Anthony Pompliano:And so I think that people, it's very easy to get attracted to the headlines and the volatile oil price. But again, the structural thing that we are facing is deflation because of deportations, tariffs, AI and robotics. Yeah, and of course, we get CPI and PCE readings this week. And this will be before any spike we've seen in energy prices. So we'll look at that according to your lines of thinking. At what point, though, if you have energy, if you have oil prices at these sustained levels, we know that funnels out into other parts of the economy. So at what point does that change if it changes?

6:27Anthony Pompliano:Well, if it's prolonged, right? If we end up going six, nine, 12 months with really, really high oil prices, obviously, that'll have a very big impact. The other thing that's pretty interesting, though, is that the U.S. dependency on oil is a percent of production. So if you think of how much energy do we need to consume from oil specifically in order to produce one unit of GDP, that has been going down over time. We're actually lower today than we were, let's say, in 2007, 2008. There's some good research that's been put out about that. Now, it doesn't mean that we're not dependent on it at all, but I do think that people are still caught on this idea that if oil prices go higher, then immediately we get higher consumer inflation.

7:02Anthony Pompliano:And I just don't see that happening in the economy. All right, so let's put it all together. We've got a war in Iran. We've got a spike, at least for now, eight-day spike in energy prices. We've got AI disruption concerns. We've got cracks in private credit. And we have a weaker jobs report. How do you invest right now? Buy Bitcoin. Now, I enjoyed that conversation with Morgan, but that's not all, though. The Wall Street Journal's Greg Gipp wrote a column titled Why the Oil Shock Probably Won't Derail the Economy and One Way It Might. In that column, he explains the following. Higher oil prices are like a tax, cutting into household consumption while boosting inflation and interest rates.

7:37But that effect has shrunk as the U.S. became less energy dependent. it. He goes on to say that the U.S. consumed 4 % less gasoline in 2025 than in 2007, but we produced 42 % more goods and services. And in the share of households' consumption of energy, including electricity, natural gas, and gasoline, it fell from 5.7 % in 2007 to 3.7 % last year. Meanwhile, the shale revolution has turned the U.S. into a net exporter of petroleum and a major exporter of liquefied natural gas. That means the hit to consumers is offset by a boost to producers. So with this in mind, everyone just needs to take a deep breath.

8:16I know that's not gonna be popular to say, but it is true. The doomsday predictors, like I said, are out in full force. They will tell you the perils of a persistently high oil price. They will promise you that the world is ending or how the US economy is going to suddenly collapse. None of it is reality though. The truth is that every single nation state involved in the Iran conflict is incentivized to get this over with quickly. The U.S. wants to claim victory as fast as possible. Iran wants the bombs to stop dropping. China needs oil to import into their country. In European countries, they're simply looking to return to a world where stability rules the day and they don't have to make hard decisions.

8:52So if the conflict in Iran is short-lived, oil prices won't be persistently higher. If oil prices are not persistently higher, then inflation is not going to soar to ridiculous levels. And if inflation doesn't soar higher, then the Fed is going to be forced to cut interest rates and print more money to deal with the deflationary forces. Now, I don't make the rules here. I just try to watch what's happening in the world. I try to investigate the data and I try to figure out where do we go from here. I know that there is a lot of emotion that is tied up right now. Oil prices are going all over the place.

9:24Stock market is gyrating left and right, up and down. Bitcoin's holding in there while gold is selling off. People are confused and they're scratching their head. But what I do know is one thing. The American economy right now, it's pretty resilient. Companies are producing more profits. They're doing it with less employees. Those companies are becoming more valuable over time. We know that the world is shifting from purely being dependent on oil to now electricity and many other sources of energy are becoming much more popular. And if the United States is becoming more efficient in the way we produce goods and services, but doing it by consuming less gasoline and less oil, that's good in these situations.

10:03If you add in on top of that, that the United States thought ahead hopefully, and we went down and when we took Maduro out of Venezuela, we struck a deal to have access to the Venezuelan oil. That obviously is gonna be a net positive in this situation because we can go and we can use that oil, bring it onto the global stage, and we can keep prices from soaring higher. Now, the critique of that, or maybe the negative side, is that we had a strategic oil reserve in the United States. Under President Biden, we depleted a lot of it. but then under president Trump, we haven't refilled it. And so over the last six or seven years, we went from having a huge strategic reserve to not having a lot.

10:40And so that Venezuelan oil now becomes much more important. And so as you watch the geopolitical chess get played here, the number one thing I keep coming back to is does higher oil prices drive domestic inflation in the United States? And the short answer is there can be some minimal impact, but overall deflation is a bigger risk than inflation. and short-term price impact on oil is not gonna derail the structural issues that we face. So everyone chill out, the Fed needs to cut rates and my guess is that the consumer's gonna end up stronger by the end of this year. In stocks, it's gonna just be like tariffs.

11:18Remember when everyone was freaking out in April of 2025? By the summertime, we were at new all-time highs. If this war ends and the conflict isn't nearly as long as everyone thought it was gonna be, and stocks are going right back to all-time highs, all assets are going to do well and everyone who's panicking right now, they're going to look ridiculous in hindsight. That's it for today's show. Thank you guys so much for watching. Please remember to subscribe on YouTube and I'll see all of you live from the desk of Anthony Pompliano tomorrow.