Bestselling author and Bear Traps Report founder Larry McDonald has warned that the war between Israel and the Hamas terrorist group could be “extremely inflationary,” while lamenting that the decarbonization movement has led to dwindling oil patch investment and predicting that $250-per-barrel crude could be on the horizon.
Mr. McDonald made the remarks in an interview on Fox News, in which he said that the “massive stress” that is now gripping the Middle East would combine with an estimated $2 trillion investment shortfall in oil, gas, and key metals, raises the risk of oil prices soaring.
“Capital expenditures in oil and gas and metals is really in about a $2 trillion hole,” he told the outlet. “And ESG is a part of that, the whole decarbonization movement has been scaring investors out of these companies, out of investing in these projects. So we have a massive underinvestment.”
Mr. McDonald suggested that ESG, along with oil patch underinvestment driven in part by an attack on fossil fuels from the camp of climate alarmists, as well as the prospect that the Israel–Hamas conflict spills over into a wider war, could drive up prices.
“There’s risk of definitely higher level of oil prices because of the stress that’s coming in the Middle East,” he said.
“And so in the next three to five years, we’re going to see potentially $200 oil, $250 oil,” he added. “Pretty crazy, because we’re massively underinvested in the key resources to really support the planet Earth.”
‘Extremely Inflationary’
The probability that the Israel–Hamas conflict doesn’t escalate is “low,” Mr. McDonald predicted, while criticizing recent remarks by Treasury Secretary Janet Yellen, who said the economic impact from the war would be limited and there’s nothing to suggest it will be “very significant.”Ms. Yellen recently told delegates at the annual meetings of the International Monetary Fund (IMF) and World Bank in Morocco that, “while we are monitoring potential economic impacts from the crisis [in Israel], I’m not really thinking of that as a major driver of the global economic outlook.”
“Thus far, I don’t think we’ve seen anything suggesting it will be very significant,” she said at the time.
“You could say it’s irresponsible because she’s not being honest,” Mr. McDonald said, adding that Ms. Yellen’s comments are like an airline pilot insisting “everything’s fine” when an engine has died.
More recently, Ms. Yellen told Sky News on Oct. 16 that it’s too early to understand the economic impacts of the Israel–Hamas conflict, while insisting that the United States can and should afford to help both Israel and Ukraine.
“America can certainly afford to stand with Israel and to support Israel’s military needs and we also can and must support Ukraine in its struggle against Russia,” Ms. Yellen said.
But while Ms. Yellen said the economic impact of the Israel–Hamas war remains unclear, Mr. McDonald said he’s sure it will put upward pressure on prices.
“Wars are extremely inflationary” in and of themselves, he said, because of their impact on trade routes and the need to establish backup supply chains. He said inflationary forces would be exacerbated by America’s waning role as the global policeman, whose ability to project power across the globe allowed it to ensure the smooth flow of goods around the world.
But that’s changing as the world becomes more multipolar, with high U.S. government spending adding fuel to the inflationary fire and putting the country at risk because of growing public debt servicing costs.
U.S. aid to Ukraine has hit the $100 billion mark, he said, adding that there are expectations that Israel will receive significant money as well.
“You can’t write the Ukraine a $100 billion check without opening up the checkbook for, say, Israel in wartime,” he said. “All this creates just a hole on top of everything else that’s going on in the United States.”
Heritage Foundation economist Peter St Onge referred to Ms. Yellen’s latest remarks in a post on X.
Concern About Impact of War
With the prospect of escalation in the Israel–Hamas war appearing to grow daily, a number of economists have warned that as the conflict continues, there will be more worries that it will threaten the worldwide economic outlook.“All eyes clearly remain on the tragic scenes out of Israel, and there is deep concern over what’s to come. Likely this story goes quiet for a while, but it’s clearly far from over. More likely the beginning in fact, given the voices out of Israel,” ING strategists wrote in a recent research note.
“Even if it remains localized, there will be concern that it becomes much bigger and more dangerous.”
Mr. St Onge said in a post on X that, at the end of the day, it will depend on the extent to which the conflict intensifies and expands to other regions.
“For the real economy, everything depends on how far the conflict spreads. If it is contained, we will get drama and markets but little on the real economy,” Mr. St Onge said.
“If, on the other hand, regional powers and the United States are drawn into a deeper war, we could be looking at oil dealing a catastrophic hit to inflation, which would drive the Fed to pull out all the stops and hike interest rates to economy-crushing levels we have not seen since [former Fed Chair] Paul Volcker.”
Addressing the issue of the Fed’s interest rates, Mr. McDonald told Fox News that he thinks that several factors will put pressure on the central bank to lower rates, despite the persistence of inflationary pressures.
“The banks are stressed. At the same time, we have this massive stress in the Middle East. We have a government shutdown potentially for November 17th. So if you’re [Federal Reserve Chair Jerome] Powell, you’re in a very difficult spot,” he said.
Mr. McDonald said that, with all the geopolitical tensions and another looming budget showdown, “the Fed is done” hiking interest rates.
“They probably cut rates by 100 basis points by next July,” he predicted.
In the face of soaring inflation, the Fed has raised interest rates at its fastest pace since the 1980s. The benchmark fed funds rate has gone from near zero in March 2022 to within its current range of between 5.25 and 5.5 percent.
