Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / How Iran Conflict Is Driving Oil Above 90 Dollars
Transcript
- Lucas: Luna, I was looking at the crude complex this morning, and we are seeing a pretty sharp divergence playing out. WTI crude is up nearly 4 percent over the past five days, sitting around 82 dollars a barrel. Brent is even higher, up almost 5 percent to 88 dollars. And the big driver, of course, is the resumption of hostilities in the Middle East. Luna: Yeah, the headlines out of Iran this week are pretty intense. Ships are shunning the Strait of Hormuz again, and we've got that toll plan that's been in the works. It feels like a genuine supply risk, not just market noise. Lucas: Exactly. And I want to focus on something that I think gets overlooked when we talk about geopolitical oil spikes — the knock-on effects on inflation expectations. The 10-year breakeven inflation rate ticked up to 2.25 percent this week. That's not a huge move, but it's moving in the wrong direction if you're the Fed. Luna: Right, because oil feeds into so many other prices. Gasoline is already up to 3.85 a gallon nationally. And we know core CPI is still sticky. Lucas: Before we go deeper on the inflation angle, I want to mention something quick. You know, this show stays ad-free because a small group of listeners chips in monthly at buy me a coffee dot com slash fexingo. If you've been following along for a while and feel like you're getting something out of it, that's how we keep the lights on. No pressure at all. Luna: Yeah, it's a model that works because it's honest. We don't have to tailor anything for sponsors, and we can talk about whatever we think is important. Lucas: Exactly. So back to the Iran situation. The Strait of Hormuz toll proposal — it's essentially a levy on ships passing through, meant to fund compensation for any disruption. But the immediate effect is that shipping costs are rising, and some vessels are rerouting entirely. That adds days to transit times and tightens supply. Luna: And we saw that in the data. Brent's structure is in backwardation again, which tells you the market is pricing in near-term shortages. The five-day gain on Brent was nearly 5 percent, as we said. Lucas: Now compare that to what's happening in clean energy. The Invesco Solar ETF, TAN, dropped 4.4 percent over the same period. Enphase Energy, a major solar inverter maker, fell over 12 percent. First Solar was down nearly 7 percent. Luna: That's a huge gap. Oil stocks like Chevron and Exxon are up 4 and 2 percent respectively. So the market is clearly rotating back into fossil fuels on this fear trade. Lucas: But here's the question I keep coming back to — does a sustained oil spike actually help renewables in the longer run? Because if oil stays above 90 dollars, the economics of solar and wind look more attractive by comparison. The levelized cost of energy for solar has fallen to around 30 dollars per megawatt-hour in many markets. At 90-dollar oil, natural gas is more expensive, and that makes renewables the cheaper alternative for new capacity. Luna: That's the classic substitution effect. But the problem is that higher oil prices also raise input costs for solar manufacturing — things like polysilicon and transportation. So it's not a clean win. Lucas: Right, and that's why you see the divergence in stock prices right now. The market is focused on the short-term disruption, not the long-term substitution. But if the Iran situation drags on for months, you could get a structural shift in investment flows. Luna: Let's talk about the inflation data a bit more. The PCE price index rose to 131.5 in May, up from 130.94. Core PCE is basically flat at 130.1. So inflation isn't spiking, but it's not falling either. Lucas: And oil is the wildcard. The breakeven rate I mentioned — 2.25 percent — that's the market's expectation for average inflation over the next ten years. It's still within the Fed's comfort zone, but it's creeping up. If oil stays elevated, that could delay rate cuts. Luna: Which would be bad for growth stocks, including clean energy names that are still unprofitable or highly leveraged. That's another reason solar stocks are getting hammered. Lucas: Exactly. Higher for longer interest rates compress valuations on future cash flows. And many solar companies are still burning cash to scale. So you get a double whammy: higher oil hurts sentiment for renewables in the short term, but higher rates hurt their financing costs. Luna: So what's the play for an energy investor right now? Stick with the majors? Or start nibbling on beaten-down solar? Lucas: I think the oil majors are probably still the safer bet in the near term. Exxon and Chevron have strong balance sheets, they're buying back shares, and they benefit directly from higher prices. But if you have a longer time horizon, the sell-off in solar might create opportunities. Enphase at 39 dollars is down over 60 percent from its peak. That's a lot of pessimism baked in. Luna: But catalyst matters. What would turn sentiment around for clean energy? A ceasefire in the Middle East? Or lower interest rates? Lucas: Both would help. But I think the bigger catalyst is actual policy progress. The Inflation Reduction Act is still law, and the tax credits are still flowing. But implementation has been slow. If we see permitting reform or faster grid interconnection, that could reignite the narrative. Luna: And on the oil side, we should note that the IEA recently pushed its peak oil demand forecast to 2030. So even the agency that's been most bullish on renewables acknowledges oil demand still has room to grow. Lucas: Right. And that's partly because of demand from emerging markets and petrochemicals. But also because the energy transition is not linear. Events like this Iran crisis remind us that oil is still the marginal barrel for the global economy. Luna: So where does that leave us? Are we looking at a prolonged period of high oil prices, or is this a spike that fades? Lucas: That depends on two things: first, how long the Strait of Hormuz disruption lasts. If it's a matter of weeks, then we probably see oil settle back into the 70s or low 80s. But if it drags on for months, you could see sustained prices above 90 dollars, and that starts to feed into the broader economy in a meaningful way. Luna: And the second factor? Lucas: OPEC's response. They have spare capacity — Saudi Arabia alone has about 2 million barrels per day of idle production. But they've been reluctant to use it, partly because they want higher prices to fund their own fiscal spending. If they decide to open the taps, that could cap the rally. Luna: It's a delicate balance. Too high and they destroy demand, too low and they can't pay their bills. Lucas: Exactly. And that's the core tension in energy markets right now. We have geopolitical risk pushing prices up, but economic headwinds and potential demand destruction pulling them down. The next few weeks will tell us which force wins out. Luna: And for listeners who want to keep up with these crosscurrents, that's what we're here for. We'll keep watching it. Lucas: Absolutely. I think the key takeaway today is that the oil-renewables divergence is real, but it's probably temporary. If you're a long-term investor, the energy transition isn't canceled — it's just being tested. And tests create opportunities.