The worst energy crisis in history is on the horizon [very long post]

I don't think I need to talk about how devastating the war on Iran has been for the region. It's a brainless slaughter of human life and wealth that will leave Israel, America, and the Gulf much worse off.

I work in the oil and gas industry and have had a fascination with energy since I was a kid. I'm telling you as bad as the oil situation sounds, it's going to get significantly worse and while there are a few headlines about how the price of fuel is up, not enough people are warning of a global energy crisis that could come worse than anything ever seen. Honestly most people in my industry even are not taking this seriously enough because almost no one working today was working during the 70s when things were bad.

I started really following the war on Tuesday and as soon as I dug in I realized how overconfident Wall Street was about this conflict ending. Banks were forecasting oil would go to mid $70s per barrel, up from $65 before the war (remember this number), JP Morgan called it early at $100. That isn't even close to enough. Finally today there have been headlines about how it could go to $150 or $200 in the coming weeks. That is more like it but it could get much worse still.

How do you know this will be that bad?

The important benchmark I'm using are the oil crises of the 70s. I'll point out that both of those crises were caused by Israel fighting with it's neighbors and revolution in Iran. Both the crisis of 1973 and 1979 saw 6-7% of oil production taken offline resulting in a 400% and 150% spike in the price respectively. With that said, the oil tied up in the Gulf is 3 times that level. Oil isn't just any commodity, you need it to have a functioning society and it's not going away any time soon. Societies that lose access to oil will face collapse. If 20% of the world's car production went offline tomorrow, cars would be more sought after but you can hold on to your car longer, buy a used one, buy one you didn't want, whatever. Losing access to oil means your car won't work at all. 90% of what you need might as well be 0%. You can't to work with 9/10ths of your journey completed. So take that 20% of global production being cut and compare it to the much lower cuts of the 70s which sent the world's economy into recessions and you can't start to see how big the problem is.

You might be asking if this is so bad why hasn't the world exploded yet? Energy crises can take months to manifest. Oil prices didn't peak after the Ukraine invasion until about six months after the crisis started. Many other energy shortages in the past are similar with months between the start and the peak with a steady climb in between.

The Strait of Hormuz being closed leaves all that oil and gas with nowhere to go as you might have heard. I'm going to emphasize this more than just here but there are many people saying stuff that have no idea what they're talking about. There is almost no way to get the oil out. Some pipelines are available but two have already been struck by Iran. At best 25% of Gulf oil can be sent on the East-West Arabia pipeline to the Red Sea but that's not even close to enough to relieve the crisis. There were talks to expand that pipeline a few years ago but they fell through. Apparently that stupid line city project was more important to the Arabians than even a little bit of security.

The headlines you're seeing about shutting down oil and gas production being a headache are more or less accurate. Oil pumps don't have an on/off switch. Shutting down and ramping up production takes time. Another point I'll emphasize more than once: even if the war ended tomorrow, and it doesn't look like it will, shutting down a bunch of production means it's not going to come back anytime soon-which would be whatever if it was 2020 and there was a glut of oil, but it isn't. There was supposed to be a small surplus of oil this year to keep prices down but that's gone now.

How and why is there so much damage?

If you know where to look there are smart people on this topic who do have a holistic picture of what is going on. But one thing I haven't seen a single person mention is Iran, in attacking their neighbors, is setting up for success when the conflict is over. Their neighbors in the Gulf and to their north in the Caucuses and Central Asia, are their economic competitors. By bombing their energy production Iran is making sure the market will be open for them when the war ends, whether that's in a week or a year. It's in their interest to blow up all the fields, processing plants, refineries, smelters, pipelines and liquefaction facilities while the bullets are flying and they can get away with it.

On top of all of that, the Gulf States in the region as well as other countries are rivals with Iran so even without the economic picture the Iranians want to strike their opponents down.

Why am I not hearing about how bad this is?

There are a couple reasons for this. One reason that's often cited is people don't pay attention to things they take for granted until something goes wrong, that's always a factor. But also everyone working in this industry and in most industries, is used to the neoliberal era of the 80s and after the Cold War. In these times, the world runs on hyper efficiency with little margin for backups. The older people who worked during the 70s are gone and replaced with generations who aren't used to the world's most valuable commodity being thrown into chaos because of a "conflict". People have started to adjust to a more chaotic geopolitical reality since COVID but not fast enough. Everyone knows this will cause a supply disruption but they're not expecting a meltdown.

What if the war ended tomorrow?

If the war ended tomorrow we would still be in big trouble globally. A lot of production has already been shut in and might take weeks to turn back on. Much worse, bunch of infrastructure has been destroyed and will take years to rebuild. Also not being discussed, much of the work needed not just to repair but to operate energy infrastructure is specialized labor from the US, Europe, and Asia. Any sane specialist is going to be thinking very carefully about traveling to a region that just erupted into flames and chaos that can't be escaped in an emergency.

Can this be fixed?

I have to say while I paint a picture of complete doom and gloom there is room to prevent the worst from happening. It's possible that a deal might be struck, the strait might open in a limited way, a ceasefire could be negotiated for energy infrastructure, etc. This would still be a disaster as I mentioned but would prevent an energy crisis. But that brings up the point about the US and Iran's stances…

What are the US and Iran doing?

I won't go into this at great length I don't think but it's clear Trump had no idea what he was doing and neither did his cabinet. They really seemed to think that because Iranians hate their government, and they do, that a few bombs would just scare Iran into giving up and that protestors would magically take over and welcome back the pretender who wants to live out his palace fantasies. Anyone who could do a basic and honest analysis of the situation could have realized that would never happen. As much as Iranians hated the Ayatollah, everything I've seen is that they hated the Shah at least as much if not more. This is before the bombings started which, in times of attack, human beings consistently rally around their country even if they hate the government. The notion of "He's a bastard but he's our bastard" is pretty reliable.

Additionally Iran, unlike Venezuela or other countries, isn't a very centralized government. There's a complex structure of politicians who run the country rather than a single person. Then there's the IRGC which is a force of well over 100,000 soldiers who function somewhere in between a paramilitary force and a mafia with loyal and dedicated members across the country in positions of power with weapons and impunity from the law. They're not going to just roll over because their boss was taken out especially when you factor in their religious zealotry and a lack of internal unrest since the war started.

This is all bad for stacking odds considering regime change but the disaster here is what Washington's plans for the war were. I know it's a shitlib talking point but it really bears repeating here, Trump has no idea what he's doing. There is no plan beyond what the Pentagon drew up in terms of military operations. All the problems I've talked about with the global economy and trade network being thrown into chaos were never factored in at all. There was no plan for Iran striking the Arab states in the Persian Gulf or the Caucuses, there was no plan for stockpiling weapons and countermeasures to make sure we could protect against Iranian strike capability, there was no plan for what a shutdown of the Strait of Hormuz would do to the global oil supply let alone all the other things that go through there.

In defense of Trump, he's done a ton of things in the ten years he's been on the political stage that his haters said would cause the end of the world. Much of what he did was genuinely bad but it didn't cause a global catastrophe…until now. He went double or nothing one too many times.

Can the US protect the shipping traffic?

I'm not an expert on modern naval warfare but most of what I've seen is no. The number of US ships in the region isn't much more than a dozen. The ones that are there are busy as you might expect. Our countermeasures are depleted and it doesn't take much from Iran to devastate an unarmored shipping vessel carrying tons of millions of dollars of petroleum or weapons, or anything else flammable and important.

What other disasters am I not hearing about?

A lot. Some of this you might have heard about but I'll list everything I can think of. The Persian Gulf is the factory of 20% of the world's liquified natural gas supply (LNG). The dynamics of global gas markets are slightly different than oil and I can explain them if you're curious but countries in Europe and South and East Asia are vulnerable to losing their natural gas just like in 2022.

Because of the cheap energy, the Persian Gulf is a hub for several industries that are energy intensive. Most notable are aluminum and metals smelters and fertilizer production. So expect aluminum prices to go up along with a fertilizer shortage which will drive global food prices higher.

Qatar and the UAE are home to big aviation hubs for moving people and cargo between East and West. That's come to a halt obviously so expect any air cargo or trips you have planned through there to be in disarray. Also little mentioned, because of the Ukraine war and both danger from warfare and sanctions, many flights between East and West are going through Azerbaijan. This is a narrow corridor that could be thrown into chaos if anything happens disrupting air traffic further.

The strait being closed now means a large portion of global shipping tonnage, especially tankers, are trapped in the Gulf. This might sound obvious but that means those ships cannot be redeployed elsewhere. So if you are moving goods internationally, even if it's not involved in the warzone, you're going to have a harder time finding a ship to put it on.

The countries in the Gulf are desert hellholes that require large inputs to live in. They bring in large amounts of food and make their water from the ocean. There's not going to be enough food getting through so that could quickly be a disaster. And people are right to worry about a desalination plant being hit and wiping out the water supply to these places.

The lack of shipping is also going to be a problem for the US military fighting in the region. Fighting a war means a lot of supplies. There are good discussions on what if the US runs out of interceptors or other equipment. In addition to that people should be asking, how do you resupply a military that's trapped in the Gulf with no shipping going through?

Who will be hit the worst?

Countries that rely on large energy and crop inputs are going to be devastated. South and East Asia as well as Europe are places I'd be most worried about. Europe will be hit after Asia because they're less reliant on the Middle East but it will hurt them in due course. Rationing of food and energy in these places is a very real possibility. If you're in North America expect to see much higher gasoline prices but my guess is not rationing. You never know though.

Are there alternatives the world can rely on?

The short answer is yes but not enough. In terms of oil and gas there might be some ability for some countries to bump up production but the loss of millions or tens of millions of barrels a day isn't going to happen overnight, or even over a decade. Once oil wells are built they are usually operated at or near capacity to get the return on investment started ASAP. Companies don't build oil wells and just let them sit. Not large amounts of them anyway.

I know a bunch of you are going to shout about green power. You can call me an industry shill but I'm skeptical non-fossil alternatives are going to make a difference in the short term, although maybe in the long term. The most important commodity up for grabs here is oil, as of right now renewable energy is usually focused to generating electricity. Despite what you might here, oil is rarely used to generate electricity because it's too expensive. It's usually used for transportation and industry. Sure, if you have an electric car renewables can help get you through this crisis but most people don't and we're not going to replace the billion internal combustion cars on the planet overnight with electric ones.

What should I do about this?

If you want to take a vacation that involves an expensive flight, it's better to book now it now rather than later. If you're wondering when do plan your trip, it's probably better sooner.

If you're looking for a job, the energy industry will likely be hiring soon. Not just oil and gas but renewables and nuclear too. I wouldn't be putting in resumes just yet, wait until things feel really bad.

If you can prepare for living the next year or so without a car, or without driving so much, do it. Get a bike, check to see if you can take the train to work, if you're buying a new car choosing the more fuel efficient model wouldn't hurt.

I need to be very careful here and say the following is not investment advice. But I have personally moved a bunch of money into energy stocks as well as some others. I can give more details in the comments but if you want a single stock I like it's ConocoPhillips as they're a competent company with operations centered mostly in the Americas and Africa and would benefit if the price of energy were to spike overnight without their assets being threatened.

What should I pay attention to?

Again I can give more recommendations but I've been a longtime reader of oilprice.com . There are some good writers there but most importantly they often write articles about topics that are actually important rather than flashy stuff that doesn't matter. There are good articles written by a lot of the mainstream press but a lot of it is also garbage. Oilprice has been pretty good consistently.

Keep an eye on the price of oil, WTI tracks American oil prices and that is really all you need right now. Keep an eye on marinetraffic to see if any ships are actually traveling through the Strait. The crisis could be ending/averted if lots of ships travel through again. Not just one but regular and heavy flows…I mean traffic.

Anything else?

I have to say again that I'm painting a very bad future obviously, but the worst is not inevitable. I don't want anyone to come back and say I am an alarmist liar in three months if the worst doesn't come to pass. I'm writing this because people are:

1. Not imagining what the worst case scenario actually is
2. How likely the worst case or very bad scenario actually is

If anyone reads this and there are comments I'll try and respond to any questions.

I'm sure there are some smart people who are going to fill in gaps so other people's comments are worth reading too.

TLDR: Oil and other energy commodities that come out of the Middle East are crucial to the global economy. The war is likely to cause a massive disruption in global oil supplies which could result in somewhere between a global economic recession or mad max if we don't start deescalating soon.