supply and demand

In the News: Supply Chains and Yoyos

photo shows a silver yoyo and its string

There has been a lot of talk in the news lately about problems with the supply chain. Fuel shortages, power shortages, microchip shortages, transportation shortages—these days, it seems like there is just not enough to go around.

Listening to dire predictions about how much worse things will get, it is easy to get nervous for the future.

We have been here before, though. Remember the early days of the pandemic? Bare grocery shelves and toilet paper panics. Or the early days of the recovery? Home values shooting up and hardware stores adjusting lumber prices multiple times per day.

For one item after another, we have watched supplies dry up to a trickle—and then come flooding back. Once the initial supply crunch is resolved, quite often other, smaller shortages eventually come back. And eventually go away.

The global pandemic has done a lot to expose the weakness of our supply chains. Sometimes, it seems each one is less like a chain and more like a yoyo spinning up and down, up and down. Maybe the disruptions get a little slower each time, and eventually they will come to rest.

But none of it is new. Commodities have always been cyclical. We hear about chip shortages and gas shortages, but these things happen with some regularity. The disruption of the past year and a half has just sped things up. In the past 30 years, oil has dipped below $40 a barrel at least five times and has peaked above $80 a barrel at least five times.

It is difficult to get too hot and bothered about oil being $80 a barrel when within the last decade it spent multiple years well above $100 a barrel.

What eventually cures our shortages is always the same thing: as long as it is possible to make a buck doing something worth doing, there will be people stepping up to fill that need. When gas supplies are low, oil companies drill new wells. When chip supplies are low, chipmakers build new fabrication plants. When transportation capacity is low, logistics companies buy new trucks. There is a lot of money to be made selling gas and microchips and shipping when things are tight.

New supply does not come online overnight. It can take a long time for supplies to ramp up to meet demand. And by the time they do, the yoyo has so much momentum that it usually overshoots the mark and keeps going the other way. A drought turns into a flood, slowly, but still faster than most people would expect. Supplies dry up again as prices come down and production becomes less profitable. High prices plant the seeds for low prices, which plant the seeds of high prices again.

We have been around this story before—and around, and around, and around again. Clients, if you need to go around it with us, just give us a call.


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We Know How This Works

© Can Stock Photo Inc. / numskyman

In late summer 2015, the price of crude oil had fallen in half to around $50 per barrel1. The oil industry had retrenched, cut budgets, and laid off people. Companies knew projects that would make a lot of money at $100 per barrel could bankrupt them at $50 per barrel.

We wrote then that low prices would boost demand and cut supply, planting the seeds of the next shortage and the return of high prices. Sure enough, sales of large vehicles and total miles driven are setting records and exploration for new oil has crashed.

No one knew how low prices would go—we never do. It was frustrating to invest too soon in the sector and watch our holdings shrink in value. The price of oil fell by half again! We stayed the course and kept buying perceived bargains. It is gratifying to ultimately get it right.

Now Bloomberg reports that new oil discoveries are at the lowest level since 1947. Supplies that should be coming on the market eight or ten years from now will not show up. Low prices are doing what they always do: choking off supply.

We can’t know the future. But we know how this works. If you have questions or comments about your situation or holdings, please email or call us.

1Federal Reserve Bank of St. Louis, Federal Reserve Economic Data (FRED)


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.