The US economy is wildly skewed. Entire sectors and regions are in recession, but the fantastical stock valuations of companies in the AI supply chain have been the only thing keeping the economy as a whole growing.
AI is increasingly looking like a bubble. Multi-trillion-dollar companies are emerging as markets bet on the prospect of fantastical future returns — of which there is no obvious pathway to realise. Investors are getting increasingly uneasy about its distorting effect on an otherwise depressed, debt-ridden economy where even small-scale credit systems, like car loans, are buckling.
But what pops that bubble? As Economist Alex Dryden pointed out in his article on the AI market, “Investment bubbles rarely deflate on their own. They are usually popped by outside forces”.
That trigger might be — as it so frequently is — oil prices. As historian Helen Thompson points out:
All but one of the recessions in the US since the Second World war were preceded by a sharp rise in the price of oil.
Now this isn’t immediately obvious. Oil prices are relatively stable, and demand is expected to grow enough to justify a temporary glut — that is, extracting oil over and above the world’s current needs. But there are warning signs on the horizon.
The main warning sign is electric vehicles, as Justin Mikulka points out:
“For the first time in its history the oil industry has an economically superior competitor.”
EV growth is starting to bite into oil demand. Historically, the fossil fuel industry has always rebounded from oil crashes because there was no substitute. Now there is — and it’s not just vehicles. Already in places like Pakistan, solar power is replacing fossil fuel dependence because of the latter’s uncompetitive price and geopolitical uncertainty. During the energy crisis following Russia’s invasion of Ukraine, LNG destined for Pakistan was simply purchased by richer nations. With the compounding effect of the 2022 flood revealing the advantages of distributed solar power, the nation’s solar appetite has skyrocketed.
Now that there’s a viable alternative to fossil fuels, an incoming downturn in oil demand could be permanent. If (or likely when) recovery comes, it will be in a much more unfavourable world for oil than before, and this coming shock will likely represent only the first in a precipitous downward spiral.
In fact, this ‘demand destruction’ for oil may already be advanced, and only China’s stockpiling of oil is maintaining the current market. But stockpiles fill up, and as the stockpiles are responses to increased geopolitical tension, the national security benefits of electrification will only add to the impetus for future electrification and permanent ‘demand destruction’.
There is also the coming subsidy shock in China. The nation’s EV and renewable tech revolution has been staggering, beyond almost all expectations. It has even managed to flatten the nation’s CO2 emissions. But it is a bonanza funded by subsidies — nearly all of which are due to expire in 2026. The importance of these subsidies should not be underestimated. No EV companies in China currently make a profit.
This expiry is unlikely to kill what is now an advanced industry. There will be a chaotic realignment, but the giants like BYD will pull through stronger than before. Yet there will be global shockwaves. One will directly impact the AI supply chain, as the fantastically overvalued chipmaker NVIDIA is a major supplier to the Chinese EV industry.
So, what have we got? A global economy staggering amongst geopolitical tension, a bubble to beat all bubbles, and the twin shocks of a (potentially permanent) oil price crash and the EV subsidies ending — and all with the backdrop of worsening climate change driving up inflation and inflicting constant disasters. Even if climate isn’t directly involved in any of these aforementioned risks, it could still be the trigger, as Terrence Mullan outlines:
“Climate instability isn’t the root of the problem, but it often plays the role of a spark hitting dry wood — setting off crises in societies already under strain.”
2026 will be the year when all these factors come to a head. But it is important to remember that none of them will ‘end’. Climate change will worsen; geopolitical tension will escalate, oil prices will fluctuate, and — unless a radical realignment occurs — an unbalanced, debt-ridden, and oligarchic economy will persist.
There are glimmers of hope in this story. The coming oil crisis is in part induced by renewable growth. Geopolitical chaos is encouraging greater sovereignty in green energy systems. And the AI bubble threatens to take down a notch a rapacious and cognitively catastrophic industry currently dominated by a quasi-death cult. But even a better future will now have to take the hard road which 2026 promises.
