We know the inflation situation is bad when the White House has been releasing a million barrels of oil per day from our nation’s strategic reserves. The ongoing emergency release, to last through October, will amount to about a third of total reserves.

For as long as I can remember, I have viewed the price of oil as a key indicator for the economy and the stock market. This is because oil is truly the lifeblood of the economy.

Versatile Oil

Oil is the largest source of energy. It is used as fuel for vehicles, and it’s used to generate heat and electricity. Oil derivatives are also found within innumerable products, from plastics, to chemicals, to clothing, and even aspirin and solar panels.

When oil prices rise, it increases the cost of pretty much everything and triggers inflation along the supply chain. Thus, an increase in oil prices is essentially a tax increase. It reduces disposable income for households and profitability for businesses. It can sap consumer and business confidence and lead to a recession.

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If we go by the official definition of a recession—two consecutive quarterly gross domestic product (GDP) declines—we are already in a recession. However, the National Bureau of Economic Research (NBER) isn’t ready to declare a recession yet. Historically, NBER often waits months to issue an edict, so this isn’t unusual.

In any event, the biggest use of oil is gasoline. If you have to drive, you are burning through a lot more cash at the pump, although gasoline prices have dropped significantly from their highs. And the Biden administration knows that the record-high gasoline prices won’t make American voters happy, thus it decided it had to undertake the biggest release of strategic reserves in history.

Relief Only Temporary

But America’s reserves aren’t unlimited. Releasing the reserves only provides some temporary relief. If the underlying supply and demand imbalance isn’t fixed, the same problem will persist.

Even with recession worries around the world, oil demand is widely expected to increase. The International Energy Agency (IEA), a research group aligned with the developed world, the Energy Information Administration (EIA), a U.S. government agency, and the international cartel Organization of the Petroleum Exporting Countries (OPEC), are all predicting record oil demand next year.

OPEC’s projections are the highest: close to 103 million barrels per day (BPD). That’s particularly worrisome because, among the three data sources, OPEC is in closest contact with the developing world, which is far and away the most important factor in oil demand.

The most conservative projection comes from the IEA, which predicts that despite tightening monetary policy among Western economies and a slowdown in economic activity, oil demand will top 100 million BPD this year and reach a record of over 101 million BPD next year.

While OPEC seems confident that it is capable of providing the necessary supply, there is clearly no room for error. This year the cartel has been persistently short of its output goals.

Need to Work Together

A strong implication is that any attempt by the West to cap Russian oil supplies would be catastrophic. And if Russia decides on its own to limit oil supplies, it would have the same outcome, i.e., an energy crisis far worse than what we’ve experienced this year.

One conclusion is that, barring some unforeseen event, the West will have to start cooperating with the developing world. While nothing can erase the horrors of the war, the Ukraine conflict could be a catalyst for a new and improved world order.

The sanctions against Russia have failed to bring the Kremlin to its knees, and it’s evident that anything the U.S. and its allies try to do will hurt them at least just as badly as it will hurt Russia. Thus, the sensible thing to do is to try to find some ways to work together, even if it means working with adversaries.

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