2026: The Year Of The Coyote

Should you find yourself running off that cliff, don't ever look down

Although this year will be called the year of the fire horse, at least according to the Chinese calendar, calling 2026 the year of Wile E. Coyote would be a much more appropriate choice. The world economy and oil markets have found themselves in a precarious situation: while output is still increasing, all economic and geophysical support underneath has silently vanished. Suspended in mid-air everyone waits for the fall to begin, but few dare to look down into the abyss. Instead, we see a rapid intensification of the geopolitical chess-game, which could, in the future, bring us dangerously close to a major clash… Until that happens, however, and as the old adage goes, “markets can remain irrational (far) longer than you can remain solvent.” Let’s see how long that moment lasts.

Thank you for reading The Honest Sorcerer. If you value this article or any others please share and consider a subscription, or perhaps buying a virtual coffee. At the same time allow me to express my eternal gratitude to those who already support my work — without you this site could not exist.

Let me start by stating: I’m not a trained macro-economist. I do not trade with stocks nor with commodities, let alone oil. Thus in case you were looking for investment advice, tips on how to get rich, or a deep analysis of stock market trends, I’m afraid I cannot help you. If, on the other hand, you were interested in a broader understanding of the geophysical and real (manufacturing) economic fundamentals of our present situation, you might find value in what follows. As long time readers already know, I approach economics from a standpoint of material resources: energy and minerals, following the age old words of wisdom: energy is the economy. No energy, no work, no raw materials, no food, no products, no services — no GDP. And while many believe that the stock market is a good indicator of economic success, or that we are living in a post-industrial, AI-driven, solar powered, electric vehicle utopia, nothing could be further from the truth.

Manufacturing: a reality check

Analysts following world events could discern two seemingly contrarian trends. Stock markets, GDP and economic output still seems to be rising, even as consumer sentiment and long term economic outlook keeps worsening. And while the top 10% keeps increasing its wealth and consumption, the “bottom” ninety percent seems to be stuck in a permanent affordability crisis. Manufacturing around the globe is in a world of hurt, together with citizens trying to make ends meet. You see, the massive price hikes—stemming from the supply shock induced by the response to the pandemic—have never been reversed. Yes, headline inflation figures have receded, but prices have not returned to their 2019 levels: food, energy, services still cost much-much more than before the world went into a lock-down, and wages still did not manage to keep pace. This has led to a permanent loss of purchasing power, hurting anyone in the business of producing or selling goods. That’s how a K-shaped economy looks like in real life.

The best indicator of the prevailing economic sentiment is thus not the price of stocks, but what actual people tasked with running things tell about their businesses. The Purchasing Managers' Index (PMI) is such a metric. Measured through monthly surveys, asking if business conditions in key areas (like new orders, production, employment, deliveries, inventories) have improved, stayed the same, or worsened compared to the prior month, PMI gives a much more accurate picture of what to expect than the S&P500. For a better overview these weighted responses for each component are then aggregated into a single index, providing a leading indicator of economic health. Scores above 50 signal expansion, while below 50 is a sign of a coming contraction (50 indicates no change). S&P Global Market Intelligence has just released its figures, coupled with commentary from leading analysts. And while the headline number of 51.8 recorded in December signals mild optimism, Chris Williamson, Chief Business Economist at S&P Global warns that not everything is so rosy:

“Something of a Wiley E Coyote scenario has developed, whereby – just like the cartoon character continues to run despite chasing the roadrunner off a cliff– factories are continuing to produce goods despite suffering a drop in orders. The gap between growth of production and the drop in orders is in fact the widest seen since the height of the global financial crisis back in 2008-9. Unless demand improves, current factory production levels are clearly unsustainable. Payroll numbers will also be adversely impacted if production capacity has to be scaled back.”

Put in plain English: things do not look good at all. And just as a reminder: an eerily similar situation was unfolding before the 1929 crash (and the subsequent depression). Demand has quietly disappeared—as private businesses and households went into debt deeper than ever before—leaving manufacturing companies piling up huge inventories. It is over-indebtedness and the immiseration of the average citizen which ultimately kills the economy. But back to Mr Williamson:

“A key factor causing concern over sales is the extent to which producers are having to pass higher costs on to customers in the form of raised prices, with higher costs continuing to be overwhelmingly blamed on tariffs.”

You see, there is only so much inflation consumers can bear. As people’s budget get squeezed by ever increasing food and energy prices plus insanely high insurance and healthcare costs, the average citizen is increasingly forced to skip purchases. Is it any wonder that half of all U.S. consumers blame high prices for poor personal finances?

Source: Reuters

The Institute for Supply Management (ISM) manufacturing index captures the sentiment even better. As it turned out Trump's sweeping tariffs have undercut manufacturing by drastically increasing input (raw material) costs, even as he touts them as necessary to shore up a long-declining domestic factory base. Well, the results are in: there is no real growth to be seen beyond the sectors lifted by an AI investment boom. You see, the problem goes much deeper than what could be solved by restricting competition from abroad.

Over the Pacific, in China, manufacturing is also having a hard time. Overcapacity and a frantic competition between companies has led to shrinking (and in some cases negative) corporate margins. See solar panels for example. Yet, Asian companies have no other choice than to reduce prices further, even as Chinese customers remain reluctant to spend. If the situation in the West reminds analysts to a Wile E. Coyote moment, then in China the prairie wolf has strapped on his rocket boosters before running off that cliff… Production capacity keeps growing, while a similar growth in demand is nowhere to be seen. Unused capacity, on the other hand, ties up capital, raises maintenance budgets, and reduces efficiency. And since all this investment was financed from preferential government loans, this worsening situation puts the Chinese administration in a tough situation, too. I’m not saying that all is bad in China, but these are clearly signs for things going from good to bad. Forget the intense energy, passion, and independence of the fire horse. Welcome to the year of the coyote.

Drill, baby, drill

With this background in mind it’s perhaps not too hard to understand why the world seems to be awashed in oil. All the raw materials are mined, harvested and delivered to manufacturing plants by diesel trucks and heavy machinery, just as finished goods leave the factory on a flatbed or onboard a container ship. Consequently sluggish demand for goods results in a sluggish demand for oil. At the same time oil producers keep pumping petroleum like there is no tomorrow. Despite a lack of demand growth and falling prices crude oil production has surpassed its previous peak (recorded exactly 7 years ago), and U.S. output is also breaking records. Yet another Wile E Coyote moment.

Granted, operators rather pay lower dividends, fire staff, and implement other cost saving measures, than opt to reduce their output.¹ If prevailing economic and geological trends continue, though—i.e. low demand growth combined with a slow but exponential increase in extraction costs as rich deposits deplete—this latest bout of production increase could easily prove to be the last in history. With profits drying up, demand stagnating and operational costs increasing, it’s not hard to see how investment in new production (replacing depleted wells) is at an increased risk. As a recent summary from RystadEnergy found:

“Over the next decades, the capital needed will likely not be available to meet continuously increasing oil demand, service prices could skyrocket, and there will likely be limited appetite for innovations to sustain such high emissions from oil.”

Without an ever growing investment in existing and new fields, however, depletion will simply take over, and will most likely tip world oil production into a permanent decline—as seen on the chart below. With that said, a worldwide absolute peak in oil production is still years away. Even if prices were to remain low (around $50 in real terms), total output would not peak until 2030. In a theoretical “high case” scenario—where oil prices manage to rise far above $100 per barrel without bankrupting the world economy—on the other hand, total oil production would not peak before 2035...

Ally vs ally

And what world powers, and America in particular, do amidst all this? They double down on wetiko: the psychosis eating the world alive. Instead of using this small window of overabundance to make preparations for the long decline to come (making cooperative arrangements, reinstating arms control, reducing geopolitical tensions etc.) they use this time to gain economic, political, and—if they deem necessary—military leverage over oil producing regions of the world. Oh, and to hike their military budget by a whopping 50%. Honestly, what did we expect…? That they look down, sober up and begin to appreciate the gravity of our situation? Surely, you jest. They rather throw the last bits of an international law based order on the bonfire... Yet, despite all this maneuvering, oil markets, crazy abstractions though they are, remain dangerously complacent.² Why, what could possibly go wrong? Sanctions on oil exports? Attacks on the Russian shadow fleet? Seizures of tankers left and right? The U.S. threatening to hit Iran (again)? Who cares? Been there, seen that.

This general indifference—or outright nihilism—is what gives a special context to the recent abduction of Venezuela’s Maduro, aided by a betrayal by his own staff and generals. Nothing seems to upset oil markets these days… Still, despite the quick success, Venezuelan military command, internal security services, and senior civilian administration remains intact, which means that the U.S. will have to actively “manage” the situation for quite a while. The newly sworn in president, Delcy Rodríguez, is already under immense pressure to kick out and sever economic ties with China, Russia, Iran, and Cuba, on top of agreeing to partner exclusively with the U.S. on oil production and favoring America when selling their heavy crude oil. (On the other hand, I would not be surprised either, if she refused to go along, even as Trump threatened her with a land invasion… The situation is far from being resolved, that’s for sure.)

In the thick of all this uncertainty around Venezuela’s future, one thing was blatantly obvious from the get go: infringing on the country’s sovereignty had zero to do with drug cartels. As usual, it was all about oil. Restoring Venezuelan oil production to its pre-sanctioned levels, however, would take quite some time and money: around $100 billion spent over a decade to be precise. And while the country’s proved crude reserves are estimated to reach 300 billion barrels, its oil is very heavy (thick) and expensive to extract.³ It’s thus very unlikely that amidst such uncertainty and low prices it would be worth lifting for any oil company (state owned or private). It seems, on the short run at least, subduing Venezuela was not about producing more oil—but to treat it as a nest egg, reserved for later use and prevented from getting into the “wrong” hands. If the U.S. takeover proves to be successful, China will most likely have to look for another source of heavy crude, saying goodbye to 395 thousand barrels a day (or 3.5% of its total oil imports). And while that figure seems low today in a world seemingly awashed in oil, people will kill for that amount in a decade’s time. I’m not sure if that level of foresight is available in the U.S. (certainly not at the presidential level) but at least it worth taking this possibility into account.

Oil and natural gas provinces around the Arctic. Who told there is no oil involved in the Greenland affair? Source: Geology.com

Up next in the regime change wish-list are Cuba, Columbia, Mexico, and Greenland. While the first three are motivated (but not justified in any way) by political reasons—and the personal ambitions of the U.S. secretary of state—Greenland is a special case. This time around, last year, I already wrote about U.S. ambitions regarding the biggest (and most frozen) island of the world, and how the United States Geological Survey estimates that there are significant oil reserves around the island. Just like with Venezuelan oil, though, the energy and resource cost of tapping these reserves would be enormous.⁴ Yet, presuming strategic foresight (which might or might not be there) these reserves could also be seen as a nest egg, not an omelette ready to be served. And just as with the South American case, it looks more important to prevent them from being tapped by others, than ramping up production starting tomorrow.

There are, of course, other, more urgent needs behind Greenland’s American takeover. Even if there were no oil there, threats of seizing Greenland should still be taken very seriously. Not because the current setup threatens U.S. national security in any way (the island belongs to NATO member Denmark) but because formally annexing it would make Greenland and its surrounding waters off-limits to Russia and China. See, the island’s coastline is full of former U.S. air bases (established during WWII). These former, and still operating bases (The Thule (Pituffik) airbase, US air force's northernmost base) could be used to not only to monitor the North Atlantic, but as potential headquarters (supporting theater-wide mission command, as well as hosting intelligence and signal units) in case a full scale Europe-Russia war would break out. Under that scenario hitting these bases would constitute an attack on America itself, potentially invoking U.S. nuclear retaliation. Thus, should the ongoing U.S.-Russia proxy war escalate / reignite later this decade (this time involving the entire European continent) America could continue to direct NATO activities from a close proximity from Greenland, without being exposed to the risk of a hyper-sonic missile strike. (Too bad, that continental Europe and Britain would be still destroyed in the process.)

USAF C-123s at Narsarssuak Air Base Greenland 1956. Source: Wikimedia Commons

The Europeans have outsourced their security to the U.S. and now, as a result, have no means defending themselves against it. This is especially so, if you consider that they outsourced their energy (LNG and oil) supply to the same “vendor:” 27% of the natural gas and 21% of the oil consumed in the EU now arrives from the other side of the Atlantic. The side, which is now actively threatening the block with a hostile takeover of a large chunk of its territory. This dual dependency, as a result, makes a formal military takeover practically unnecessary. Should Denmark and the EU stick to their guns, the U.S. could easily say: “OK, we’re out of NATO. And no more gas for you.” I don’t think Europeans would ever risk doing that. Instead, they will most likely end up selling Greenland to America, exchanging the valuable territory for U.S. bonds or heavy crude extracted from Venezuela.

Closing thoughts and predictions

So, what has the year of the coyote in store for us? A major economic crash? Probably, but I would not put the chances of it happening above 30%. A direct war with China or Russia? I don’t think so (I estimate that to be below 5%). The most likely scenario for this year, and the coming two or three, is a complete and definitive end to the growth for the global economy. Wile E Coyote will find himself suspended in mid-air, slowly realizing the gravity of his situation. Consumers will continue to suffer as governments all around the world continue to raise taxes and return to austerity in a futile effort to arrest the onset of a slow decline. Central banks will continue to bail out commercial banks and non-financial institutions. Unless there is a huge supply shock, inflation will most likely fall, then turn into deflation in more and more areas of life. And while that might sound nice for the average citizen (what’s not to like in falling prices?!) that is exactly what happened during the Great Depression. Back then, as general price levels fell, consumers delayed purchases expecting lower and lower future prices. This has led to a downward spiral of falling demand, reduced production, wage cuts, increased unemployment, and business failures. Businesses were forced to cut costs through layoffs, further reducing spending and deepening the crisis. The burden of debt also increased as the real value of money started to grow again, leading to even more defaults and bankruptcies.⁵ Ultimately, it all ended in an economic depression lasting a decade, or until the second world war began—and this is the biggest risk in our case, too. There is an increasing likelihood that the great powers around the globe will see no other way out of this unfolding giant economic mess than to start another brawl… And while we should take it as a given that history does not repeat itself, it sure does rhyme.

Until next time,

B

Thank you for reading The Honest Sorcerer. If you value this article or any others please share and consider a subscription, or perhaps buying a virtual coffee. At the same time allow me to express my eternal gratitude to those who already support my work — without you this site could not exist.

1. Cutting production is seen as a last resort measure. Doing so would not only raise operating costs on a per barrel basis and lead to the under-utilization of assets, but would also require a sharp jump in spending just to get back to previous production levels should demand start to strengthen again. Cutting investment too sharply would also dent PDP (proved, developing and producing) volumes which generate cash flow and underpin valuations.

2. Some of the complacency on oil markets can be tied back to China’s growing stockpiles of crude oil (estimated to be around 1.2 billion barrels, equivalent to a hundred days of imports). In face of a massive surplus building up this year, this buffer certainly helps to keep prices low. Should for any reason the oil price spike, then China could stop buying oil, and use its buffer to ride through the rough patch.

3. Venezuelan oil takes a lot of energy to get: operators must generate and pump steam into the reservoir to loosen up the oil, then mix the extracted goo it with naphtha and other diluents to prepare it for shipping. “Current estimates place the EROI (energy return on invested) between 3:1 and 6:1, depending on extraction methodology, processing route, and whether system boundaries include downstream refining or only upstream production. This represents a fundamental energy efficiency decline of 80-90% compared to conventional production.”

4. Floating ice could damage offshore facilities, while also hindering the shipment of personnel, materials, equipment and oil for long time periods. Maintaining long supply lines from the world’s manufacturing centers throughout most of the year, however, would be especially hard, necessitating equipment redundancy and a large inventory of spare parts. Higher wages and salaries would also be required to induce personnel to work in the isolated and inhospitable Arctic.

5. This is why its extremely dangerous to enter a deflationary crisis with a huge debt burden. And while most pundits focus on government debt, I believe it’s a red herring. Governments can print or borrow their way out… unlike private businesses and citizens.