Re: Mental Models-Destructive/Constructive Interference In Econ Cycles.

Thinking about where we are in the Oil Cycle reminds me of this this Mental Model from Physics.

Econ cycles come in varying wavelengths; LT cycles = long wavelengths & ST cycles = short wavelengths.

ST cycles often oscillate within LT cycles.

In Oil, LT cycles are driven by capex cycles that have 5-10 year gestation periods and primarily affect SUPPLY. ST cycles are driven by the macroeconomy and primarily affect DEMAND.

In this Mental Model, I’m making a simplifying assumption that this complex interplay between Supply and Demand boils down to LT/ST impacts on PRICE.

Even this simplifying assumption is complicated by the differing wavelengths that result in periods where super-imposed waves are out-of-phase vs. in-phase.

Destructive Interference occurs when one wave is out-of-phase with another -> Overall superimposed wave is DAMPENED or even CANCELED OUT.

Constructive Interference occurs when one wave is in-phase with another -> Overall superimposed wave is AMPLIFIED.

Oil is going into a period of Destructive Interference now, but it will be followed by a period of Constructive Interference.

This is how it is entirely consistent to have a ST bearish view due to macro demand factors while still maintaining a LT bullish view due to LT capex trends.

The Structural Supply/Demand Singularity in Oil occurs when the ST cycles get back in-phase with the LT capex cycle.

I think there is a good probability of this occurring in 2024.

One thing I didn’t mention in this Mental Model is wave AMPLITUDE.

LT cycle may have a very large ultimate amplitude but wavelength is long so an negative (out-of-phase) ST cycle of large amplitude can dominate for periods of time.

👆This is my biggest concern for Oil in ST.