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The Recipe for $150 Oil
James Rickards

How do the wars in Ukraine and Gaza impact global economic growth and the U.S. economy in particular?

Both wars are ongoing and cataclysmic impacts may yet be felt. Here’s where events stand at the moment. Let’s start with the war in Ukraine…

From a strategic perspective, the situation in Ukraine resembles a smaller-scale version of the situation in Europe in late 1944. At that point, the Allies had successfully completed the D-Day invasion and liberated Paris.

On the Eastern Front, the Russians had annihilated the combined armies of the German Wehrmacht and were advancing through Poland toward Berlin.

Hard fighting remained. The Allies had to fight the Battle of the Bulge in December 1944, and the Russians encountered stiff German resistance in Poland even though they had superiority in numbers, supplies and weapons.

Still, no one doubted that the tide had turned, and Germany was on its way to defeat.

Russia Is Winning on Two Fronts

Likewise, the Russians are clearly defeating the Ukrainians despite the fact that a lot of hard fighting remains. Ukraine’s so-called spring offensive that began in early June was a complete and utter failure.

Nearly six months after it began, Ukraine only captured a few pinprick villages it was expected to take within the first few days.

Casualties are horrendous and Ukraine is reduced to calling up young teenagers, women and old men. The average age of a Ukrainian soldier is 43.

Russia has also demonstrated that NATO weapons systems are hardly wonder weapons.

Russian mines, drones and artillery have destroyed the most advanced German Leopard and U.K. Challenger tanks. The U.S. has held back on letting Ukraine use its Abrams tanks for fear they’ll end up burning on the battlefield like the Leopards and Challengers.

On the economic front, the Russian victory is even more clear-cut than on the military front.

U.S. economic sanctions have failed across the board. The Russian economy is expected to grow at a 5% annualized rate in the fourth quarter of 2023. The best estimate for the U.S. economy in Q4 is 2%, although one can expect that rate to drop as the quarter progresses.

The Russian ruble has withstood Russia’s ejection from global payments networks; it is trading only about 25% lower than when the war began after holding its level against the U.S. dollar over the first 15 months of the war. Inflation in Russia is low.

The Russian economy is on a complete war footing. There are even labor shortages as Russians take jobs in the weapons factories or enlist in the military.

Morale is high, and Putin’s approval rating is above 80% (compare that with Joe Biden’s approval ratings, which are about 37%). To the extent that Putin is unpopular, it’s mostly because many complain he’s not pursuing the war aggressively enough.

Meanwhile, Russian energy sales are at all-time highs. Russia simply sold to India and China any oil and gas that Europe did not want. Meanwhile, Germany is in deep recession even as Russia booms.

Russia’s Also Winning on the Technological Front

Russian technology has proved superior to Western technology on the battlefield. The Russian Kh-47M2 Kinzhal hypersonic missile has destroyed U.S. Patriot anti-missile batteries (about $1 billion each) and has proved unstoppable against Western air defenses.

Russia has also dramatically expanded drone production since the war began. Russia’s even developed advanced drones equipped with AI, which enables coordinated swarm attacks on enemy tanks and armored vehicles.

Russian jamming devices have disabled the GPS systems on the U.S. HIMARS precision artillery systems, which has dramatically impacted their effectiveness.

Russian tech advances have not been confined to weaponry. They’re moving quickly in the areas of semiconductor manufacturing, aeronautics, telecommunications and robotic manufacturing.

So U.S. sanctions have not only failed to stop Russia, but they have also prompted Russia to become a formidable competitor to the collective West.

I said in early 2022 right after the war began that U.S. sanctions would not only fail against Russia, but they would also boomerang and hurt the U.S.

The forecast has proved exactly right.

An Economic Blunder of Epic Proportions

As if Russian advances on the battlefield and Russian economic success were not enough, the U.S. may be about to commit the greatest economic blunder in history, one that could accelerate the flight from the U.S. dollar and destroy confidence in the U.S. Treasury securities market.

Here’s the backstory:

After several weeks of chaos in October, the House of Representatives finally elected a new speaker of the House, Mike Johnson, a mild-mannered but solidly conservative and relatively new member from Louisiana.

He got off to a good start by separating financial support for Israel from support for Ukraine. Both bills will probably pass, but by separating them, Johnson avoided the trap of having to vote for Ukraine in order to support Israel.

Many members support the latter but oppose the former, and now they can make their voices heard with separate votes. So far, so good.

Now Johnson has committed a blunder so egregious that it could rock the global financial system and cause a financial panic. Unfortunately, Johnson’s lack of experience in international monetary affairs has left him blind to the dangers.

Pure Stupidity

Right now, the U.S. holds about $300 billion of Russian assets that were frozen after the Ukraine war broke out in February 2022. Most of those assets came from the Central Bank of Russia and consist of U.S. Treasury securities.

Technically, those assets have not been converted to U.S. ownership. They have merely been frozen and still belong to Russia even though Russia cannot use them.

Now, Johnson wants to convert those assets to U.S. ownership and use the proceeds to pay for the war in Ukraine. Johnson said, “It would be pure poetry to fund the Ukrainian war effort with Russian assets.”

Pure stupidity is more like it. Such an action would amount to a default on U.S. government debt since the securities were legally owned by Russia. Nations around the world would take note and accelerate their dumping of Treasury securities and their flight from the U.S. dollar.

This would increase interest rates in the U.S. and hurt everyone from homebuyers to everyday consumers. It would make U.S. debt permanently more difficult to sell and less desirable to hold.

It would introduce a new risk premium on U.S. debt over and above the existing inflation premium. At its worst, it could trigger a dollar panic and full-scale flight from the dollar.

Johnson is playing with fire and has no idea what he is doing. Let’s hope he receives some sound advice before he goes too far.

Hamas and Israel

The war between Israel and Hamas in Gaza has been more contained from a global economic perspective, but it also has potential to spin out of control and rock the global economy.

The potential for economic calamity in Gaza is not the fighting in Gaza itself but the possibility of escalation.

Israel faces an enemy 10 times more powerful than Hamas in the form of Hezbollah, which is located in Lebanon on Israel’s northern border, and which is heavily subsidized by Iran in terms of money, weapons and intelligence.

In addition to Hezbollah, the Houthi rebels in Yemen are firing missiles at Israel. The Houthis are a direct Iranian proxy intended to threaten Saudi Arabia, but are equally capable of threatening Israel.

If Hezbollah and Houthi attacks on Israel escalate, Israel will not limit their response to those two groups. They are likely to launch attacks on Iran itself going to the root of the problem. At that point, Iran may fire missiles at Israel and close the Straits of Hormuz.

$150 Oil

In anticipation of that, the U.S. has moved two aircraft carrier battle groups to the Eastern Mediterranean and stationed one Ohio-class nuclear submarine in the Red Sea. The idea is to deter Iran from attacking Israel, but they can be used to attack Iran if the war escalates to that level.

Russia is watching on the sidelines and will support Iran if necessary. Saudi Arabia and Qatar, two of the world’s largest energy producers, are caught in the middle.

If those escalation scenarios play out even in part, expect oil prices to go to $150 per barrel or higher. That would put the U.S. and Western Europe in a recession worse than 2008 and the earlier oil shock of 1974.

In the 1974 recession, the Dow Jones index fell 45%. That would equate to a crash of over 15,000 Dow points from today’s levels.

I’m not making a hard prediction that this scenario will occur, but don’t rule it out.

It’s a good time to reduce your exposure to stocks, keep a lot of cash on hand and get your hands on physical gold and silver.


James G. Rickards is the editor of Strategic Intelligence. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He was the principal negotiator of the rescue of Long-Term Capital Management L.P. (LTCM) by the U.S Federal Reserve in 1998. His clients include institutional investors and government directorates. His work is regularly featured in the Financial Times, Evening Standard, New York Times, The Telegraph, and Washington Post, and he is frequently a guest on BBC, RTE Irish National Radio, CNN, NPR, CSPAN, CNBC, Bloomberg, Fox, and The Wall Street Journal. He has contributed as an advisor on capital markets to the U.S. intelligence community, and at the Office of the Secretary of Defense in the Pentagon. Rickards is the author of The New Case for Gold (April 2016), and three New York Times best sellers, The Death of Money (2014), Currency Wars (2011), The Road to Ruin (2016) from Penguin Random House.

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