The oil shock now roiling markets has raised the question of how far it will go. What is the market clearing price of oil? That is, the price that accommodates a reduction in world demand equivalent to the feared reduction in world oil supply. The overall loss, at present, is some 20 mbd, of which some is petroleum products. Reduce that figure a bit by adding the Saudi outlet at Yanbu on the Red Sea, together with the UAE's pipeline to the Arabian Sea; add in releases from strategic petroleum reserves (about 2-3 mbd), and other marginal increases, and you still get a ginormous reduction in supply.
My thesis is that the oil price has a lot further to run and that the market clearing price is above $300 a barrel. That sounds extravagant, but the question needs to be seen against a broad historical background. Here are some 40-year ratio charts in which we compare the price of Brent (the world benchmark) against a range of other assets.
The first is the $gold:$brent ratio. Though it has fallen dramatically over the last month, it is still well above is historical range. The reasonable expectation is that this ratio will fall to the ranges that existed for several decades. The ratio shows two dramatic thrusts upward: in 2020, when the price of oil collapsed during the pandemic, and 2024-25, when gold had a spectacular run upwards. But why do people buy gold? In order to buy energy and food, mainly. The ratio now stands at 39.15, still above the highs reached in 1988 (35.45), 1993 (29.84), 1999 (30.25) and 2016 (38.29). Note also the level it reached on the downside. The 2008 level is especially interesting. Then it fell to 6.23. That was when the price of oil spiked to $147 in the summer, driven by speculative fervor but also responding to the fear that the United States might attack Iran. Now we're facing something like the "worst-case scenario" in terms of a closure of the Strait of Hormuz, and yet the gold:oil ratio is something like 6 times higher than back then. That doesn't compute. It's going lower.
The $silver:$brent ratio tells a similar tale. It's now trading at .61, like gold right at the high point of its historic range. Silver is both an industrial metal and a monetary metal. The blowoff top that occurred in the fall and winter of 2025 looks like an historial anomaly.
Here's another ratio chart, this one showing copper in a ratio with the oil price. At .473, it's well down its downward journey. Given the scale of the oil crisis (one that will make extracting copper much more expensive and will cause at least a temporary cancellation of many projects requiring copper), I should think this one visits the bottom of the range before the year is out.
This one below is especially revealing. It shows the S&P500 divided by the oil price. Of course, it's fallen a lot (from 11.27 to 5.52) since roughly the beginning of the year, but it's also pretty evident that oil got extremely cheap before the recent decline. Given the supply shortage, it's still cheap in relation to financial assets. Look out below, I think is the proper cautionary advice.
The most sobering chart comes from Value Seeker, March 29, which computes the oil price in relation to the growth of money supply (M2). He says that the 2008 peak would now be closer to $380. In 2008, there was no physical interruption of traffic through the Strait of Hormuz, only the fear of such if the United States and Israel should attack Iran. That makes a certain contrast with today.
