Beyond Iran: The world needs to reconsider the supply chain

I’m currently up at Surfers Paradise on the Gold Coast. The second Gold Coast Gold Conference is taking place here.

When you walk down Surfers Paradise Boulevarde, people are going about their daily lives. Many are on holidays, enjoying the sun and surf, the wide variety of cuisines on offer, while the locals go to work and contribute their part in society.

Apart from seeing the elevated prices at the petrol stations, you mightn’t feel anything is different or amiss. You won’t be able to distinguish the street scene from a month ago, before the conflict in Iran began.

However, I can imagine many are mildly concerned about paying more for fuel when they fill up. They may wonder whether they should cancel their upcoming Easter holidays. For some, this may heap on more stress as they struggle to pay the bills and just survive.

The pain is real. And the media might be playing it up too, as the news cycle covers the events unfolding in Iran and the Strait of Hormuz. They bring on experts to discuss how the impact on the global economy increases as the fighting and destruction drag on.

The conflict is tragic from the perspective of loss of human lives and destruction. Not to mention how much more division this is bringing to society.

What is more striking about this episode in Iran is how precarious the world’s economy and supply chain are.

Much of this is self-inflicted. Things became worse because of the policies adopted by politicians, business leaders, and think-tanks in the last two decades.

We may have come to the fork on the road – whether to continue down the path of insanity of globalising trade or to turn back and move towards countries seeking self-sufficiency.

Choking the global supply chain

Supply chain crises aren’t new. What broke out between Israel, the US, Iran and the countries in the Gulf Cooperation Council is a case of different actors, different location, but same outcomes.

The chokepoint this time is the Strait of Hormuz. This naval passage is responsible for 20% of the world’s oil supply and 25% of global gas supply. The key countries

We’re familiar with our supply chain coming unstuck in the recent years.

A ‘pandemic’ that caused the world to lock down in 2020-23.

Followed by the Crimean conflict erupting between Russia and Ukraine since 2022.

And now this.

Our global economy only started emerging from its crippled state, walking without crutches. Oil had traded down to US$60-65 a barrel, a sweet spot that balanced producers’ and consumers’ interests.

Then came this recent conflict.

As it escalated, oil surged to as high as US$120 a barrel on Monday 9^th March.

Oil has fallen significantly since then, trading at around US$90 a barrel for West Texas Intermediate (mainly US markets) and US$96 for Brent (mainly European markets). But the fall in prices masks the fears that the bottleneck at the Strait of Hormuz will upend manufacturing and logistics.

The price is merely a signal of supply and demand. But the ramifications are severe.

Think of it as a body that experiences a major cardiac arrest. The heart stops pumping blood and oxygen to the organs for long enough, and the system will suffer lasting damage.

Choking the oil supply for weeks can cripple economies by disrupting power generation, transportation, and manufacturing. That can stifle business activity, causing inflation, unemployment, and business failure.

History repeats itself for
those who ignore the past

Among many words to describe modern society, the most fitting one in this context is recalcitrant.

Do the same thing but expect a different outcome. In Albert Einstein’s words, our policymakers are crazy.

Besides fighting each other, we have a habit of heaping stress on the world. And they’re often avoidable errors.

Our policymakers committed the world to environmental and sustainability policies, taking them to their ridiculous, impractical extremes.

No one would rationally oppose caring for our planet through sound business practices and living habits. We enjoy what we have today because those before us bequeathed it to us, seeking to improve life as they had known and lived.

However, the Green Agenda was poorly conceived and the rolling out was even worse. Many of the world’s most developed nations jumped on board this agenda without properly transitioning or laying the groundwork for reliable energy sources, business practices, and a sound risk management framework.

Instead, who can forget how they sought to phase out internal combustion vehicles and replaced them with electric vehicles, while there weren’t enough charging stations outside of the most densely populated cities?

Or the European Union finding themselves starved of gas in the winter of 2023-24 after many nations in there boycotted Russian gas imports?

Or a significant part of South Australia faced a power shortage in 2023 after heavy winds and storms flattened many solar panels and wind turbines? The government approved these infrastructures to gradually phase out fossil fuel power stations.

I could go on. But you get the idea.

Now, you’d expect that Australia should be able to sail smoothly, pun intended, despite the disruption caused by the Strait of Hormuz’s blockade. After all, we’re one of the world’s most endowed when it comes to mineral and energy resources. We even included that in the verses of our national anthem – our land abounds in nature’s gifts, of beauty rich and rare!

Right?

Of course not!

In fact, among key developed nations, we rank near the bottom in terms of the number of days of strategic oil reserves. Specifically, we have less than 30 days, and less for diesel.

Shockingly, we have no public strategic oil reserves! The reserves belong to some businesses that have stockpiled oil and diesel for their operations.

This is clearly a dire situation.

Amidst the crisis comes opportunity

When something is this stupid, you can’t blame it on incompetence.

I’d take the reverse Hanlon razor – we’re seeing malicious intent rather than incompetence.

You can remember back in 2022 the crisis over the shortage of Adblue, a key additive in diesel. It threatened to take our vast mining and agricultural sectors to their knees, not to mention our food and necessity goods if the trucks and trains stop running!

Yet our policymakers turned a blind eye when that crisis fizzled out.

So we’re facing it again because we didn’t learn from our past.

An attempt to replace those who make decisions on our behalf may be difficult and time-consuming.

Therefore, rather than wait for that to come, let’s identify opportunities to help us endure this less painfully.

Regardless of what happens in Iran, the conflict there is about accessing and controlling critical energy and mineral resources.

We’ve identified these in advance in this business, guiding our members to position their portfolios.

They’ve enjoyed significant rewards, whether in precious metals like gold and silver, industrial metals such as copper, iron, and lithium, or energy commodities such as oil, coal, and uranium.

Want to find out more?

For precious metals, check out The Australian Gold Report, where I guide you to build a comprehensive portfolio of physical gold and silver, and established mining stocks.

Or you can check out my colleague, James Cooper, who covers a wide range of commodities in his Diggers and Drillers newsletter.

That’s it from me. Have a great weekend ahead!