To The Moon

If oil $WTI Crude Oil - main 2605(CLmain)$ isn’t on your mind right now, it should be. We may be in for one of those generational moments in the energy industry as Iran and the rest of the Middle East sees both supply and transportation impacted.

Here are some things I think I know that may be wrong.

The U.S. Is a Net Oil Exporter

If you haven’t spent time playing on the EIA website…maybe you won’t find this fun. But I think it’s fascinating.

This is a table I’ve had bookmarked for more than a decade, and it tells a lot about what’s going on in the world of oil.

For this portion, I want to focus on net imports. You can see that in 2005, the U.S. was a net importer of 12.5 million barrels of oil per day. Today, we’re a net exporter of 3.1 million barrels per day.

EIA Data

That sounds great, but you can also see that the U.S. still imports about 8 million barrels of oil per day. This is because we’ll import oil, refine it, and then export the refined product to other countries. There’s a global mismatch on where refiners and demand are located, and also what type of oil refiners can actually refine.

I will also note that imports from the Persian Gulf have gone to almost zero, and OPEC overall is about 5% of U.S. supply.

There’s just one problem, in the U.S. at least.

Oil is Priced on a Global Market

Oil is fungible (for the most part).

That means a barrel of oil in the U.S. is equivalent to a barrel of oil in China, or anywhere else.

Demand is relatively inelastic (demand doesn’t change much with price), so prices can spike with even a 1% or 2% change in supply. A 20% hit to the global oil supply would be devestating.

There are band-aids like releasing oil from the petroleum reserve, but that’s going to fix the problem for a few weeks, not long-term.

This is different from natural gas, which is more difficult to move from one country to another. Pipelines exist, but natural gas isn’t dense, so to move it from the Middle East to Europe, for example, it needs to be condensed into a liquid, which is costly.

That’s why you’ll see the impact of the Iran war at the gas pump, but not in your heating bill.

Supply Disruptions Can Last Years

We’ve already heard reports that 17% of Qatar’s LNG facilities were hit and it could take years to bring capacity back online.

20% of global oil supply travels through the Straight of Hormuz and a large percentage of that is going nowhere.

Some of Iran’s oil production seemed to have been impacted, although we don’t know how much. The country produces over 3% of the world’s oil, so taking them offline could result in a huge jump in prices.

But the problem doesn’t end with the disruptions today. The problem is the disruptions long-term.

Qatar said it may take 5 years to bring its supply back online.

If Iran’s oil production is impacted that could be years of reduced supply.

Then there’s disruptions in Saudi Arabia and the UAE.

The U.S. can increase domestic production, but that’s months to years to get that going.

Offshore fields are also plentiful, but those take multiple years to begin producing oil.

The reason to keep an eye on the the war is that millions of barrels of oil could be taken offline for years if things get worse. Saudi Arabia, Iran, Iraq, the UAE, and Qatar account for over 30% of global oil production, so the stakes are high.

Demand Changes Can Be Permanent

Supply changes could last years, but when prices go up, demand can changes can be permanent.

Look at the table above and notice how much oil the U.S. consumed in 2005 and how much it consumes today.

Yes, the U.S. consumes less oil today than it did in 2005. That’s because of:

• Higher fuel efficiency standards for automobiles

• EVs are pulling away some auto demand

• Industrial demands are lower than in the 1970s

• Commercial and residential use has dropped (replaced primarily by natural gas)

• Oil powered power plants have been replaced by natural gas

Notice that changes in usage followed the Iranian oil shock in 1973 and the oil price spike from 2001 to 2008.

After both price shocks, demand changed forever.

The Cascading Economic Impact

Finally, I’m thinking about what the 2nd and 3rd order affects of higher oil prices are on the economy. If people are spending double what they were a year ago at the pump:

• Restaurants will see less demand

• Clothing company will see less demand

• Most companies will experience higher costs

• The Fed will be inclined to keep interest rates higher for longer

High oil prices are like a tax on the consumer. It makes everything more expensive and leaves less money for people to spend.

And if this war impacts oil prices for the next few years, a recession isn’t out of the question. Companies are already happy to use AI as an excuse to cut headcount and if the headcount that’s left working has less money to spend on stuff…the economy suffers.

I’m not predicting an economic collapse because of Iran, but I want to be aware of the risks ahead. I’ve lived through a stock market that was flat throughout the 2000s, impacted by both the Iraq war and rising oil prices that (I think) broke the economy and exposed the financial crisis in 2008.

I’m old enough to remember the long lasting impact of a stagnant economy and market following the 1973 oil crisis, which ultimately led to inflation and skyrocketing interest rates in the early 1980s.

Things can go south very quickly. If you began investing in the last 17 years, you’ve seen a period of unprecidented calm. That may not last forever.

These are all things I’m thinking about. I’m hoping for the best, but we live in a reality that may get worse.

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