Looking at the extreme volatility in the oil prices, thanks to geopolitical risks rising from the Middle East, which will no doubt lead to second orders effects such as rising social tensions thanks to lack of “food” and fertilizers and the ominous rise of a secondary inflationary wave (which we had discussed previously), when it came to selecting our title analogy we decided to go for “Blowback”. A “Blowback” is defined as the unintended consequences and unwanted side-effects of a covert operation. To the civilians, also called “collateral damages” in military circles, suffering from the blowback of covert operations, the effect often manifests itself by “random” acts of political violence or in some instances counter-attacks and “terrorism acts”. Originally “Blowback” was a CIA internal definition denoting the unintended, harmful consequences to a friendly population and military forces when a given weapon was used beyond its purposes as intended by the party supplying it. Examples abound such as anti-Western religious figures like Osama Bin Laden or counter-revolutionaries selling drugs to their sponsor’s civil populace like it was the case with the Nicaraguan cocaine trafficking. In formal print, the term “Blowback” first made its appearance in the “Clandestine Service History – Overthrow of Premier Mossadegh of Iran – November 1952 – August 1953”, which was the CIA’s internal history of the 1953 Iranian coup d’état, sponsored by the American and British governments which was published in 1954. Obviously, the “Blowback” from this operation occurred with the Iranian Revolution and the Iran hostage crisis. The “Blowback” from the Nicaragua and Iran-Contra led to drug dealings in American cities but that is another matter. In the case of Nicaragua v. United States, the International Court of Justice ruled against the United States secret military attacks against Sandinista Nicaragua for the simple reason that the countries were not formally at war. In similar fashion, one could make a recent similar comparison to the fact that Russia has cosmonauts and USA call them astronauts while Russia has a SMO (Special Military Operation), USA has declared a MMO (Major Military Operation). We hope, this brings some “legal” clarity to everybody. But, returning to our “Blowback” point, and further examples of “Blowbacks” includes CIA’s financing and support of Afghan insurgents, the rise of the Islamic clerics and students in 1979, the financing of anti-Assad armed groups that later morphed into ISIS are other illustrations of “Blowbacks” we think.
In our previous conversation we discussed Say’s law, namely that “Supply creates its own demand”. In similar fashion we could argue that “lack of supply destroys its own “demand”:
Asia Jet Fuel Prices Spiked Above 2022 Levels...Energy Prices Across Regions...
- Graph source Platts- Goldman Sachs – X/Twitter
As such, heightened volatility is leading the big commodity traders such as Vitol Group, Trafigura Group and Gunvor Group to line up billions of dollars in new credit lines as they position for further price spikes in oil and gas that could trigger giant margin calls. Trafigura, according to Bloomberg for instances, has secured a $3 billion credit facility to provide ”liquidity buffers” during such a “volatile” period. Vitol is looking for $3 billion while Gunvor seeks $1 billion.
Whereas “Blowbacks” can trigger significant “collateral damages” and second order effects such as widescale famines due to lack of fertilizers available, they can also re-ignite, movements such as the Arab Spring if ones look at the causality between the Arab Spring and the rise in commodity prices.
As a reminder from our past musing explaining our “pre-revolutionary” mindset which has been a recurring theme developed in our past musings:
“Historically the highest prices touched by wheat prior to the French Revolution were in 1789. Between 1780 and 1788, the average price for a “setier” of wheat (setier was an old French units of capacity equating to 156 liters), was stable between 19 pounds and 13 shillings and 25 pounds and 2 shillings. Between 1786 and 1787 the price was stable at 22 pounds a setier. In 1788 it rose by 15% but in 1789 it rose by 36% in one year, touching 34 pounds and 2 shillings. The harvest for 1788 was one third lower and this impact was sufficient enough to trigger the doubling of prices in the period 1788-1789. Just before “Bastille Day” on the 14th of July, there was a tremendous storm on the 13th of July 1789 which caused massive destructions to crops.”
Wheat prices in “pounds per setier” units on the 24 of June every year from 1728 until 1789, source - “Le prix du blé à Pontoise en 1789” by Dr Florin Aftalion.” - Macronomics – Pareto Efficiency – 15th of September 2012
On a side note, the proper French revolutionary period (1789-1794) was characterized by poor harvests and very similar meteorological factors witnessed in 1788 and 1789, namely very hot spring-summer periods with very bad weather followed by very cold winters (-21 degrees Celsius in Paris during the winter of 1788).
As well, for those interested, talking about “Monetary” Blowback this time, the impact QE2 has had on commodity prices has been clearly analyzed in a very interesting paper from the Bank of Japan - Recent Surge in Global Commodity Prices back in March 2011.
For those of you interested in “ongoing” Blowbacks and “sovereign credit exposure”, here is the link to an article we just published on LinkedIn relating to Bahrain’s fiscal situation being in the “crosshair”.
In a Pareto efficient economic allocation, “no one can be made better off without at least one individual worse off” but we ramble again…
In this conversation we would like to look at more “credit” cracks showing up in our “radar”, as well we want to look at the weaknesses of “Blowbacks” coming from the ongoing exogenous factors from the Third Gulf War.
On a side note, we collaborate with friend Geoffrey Fouvry from GraphFinancials as you probably know from reading our Substack Macronomics. As such should you want to subscribe to Geoffrey’s top investing analysis (Geoffrey manages his own portfolio and his performance long/short, no options was around > 150% in 2025) enclosed is a discount link to subscribe to GraphFinancials services of trade recommendations. Geoffrey, like us is old school value but opportunistic as well:
Also : You can view our most recent YouTube conversation with our friend Zoltan Zselyes CFA, CAIA on your Tube:
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