Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / How the Hormuz Toll Plan Is Already Moving Oil Prices
Transcript
- Lucas: West Texas Intermediate crude jumped nearly 10 percent in the last five trading days. Brent is up more than 10 and a half percent. And the proximate cause is obvious — the US is striking Iranian military assets, Iran is hitting back at Gulf states, and the Hormuz toll idea is back on the table. Luna: Right, the toll idea. That's the piece that I think a lot of people haven't really wrapped their heads around. Can you walk through how it would actually work? Lucas: Yeah, let's be really specific. The Hormuz toll is not official policy yet — it's been floated by the Trump administration as a way to pressure Iran and recoup some of the cost of patrolling the strait. But the mechanism is straightforward: any tanker transiting the Strait of Hormuz would have to pay a fee, effectively a tax on every barrel of oil that passes through. Luna: And roughly 20 million barrels a day go through that strait. So even a modest toll — say, a dollar a barrel — adds up fast. Lucas: Exactly. The strait handles about a fifth of global oil consumption. So a dollar a barrel toll is twenty million dollars a day in added cost. That gets baked into the price of crude immediately, because traders are pricing in the expected cost of future shipments. Luna: So part of this 10 percent spike is not just fear of a physical disruption — it's markets pricing in a new structural cost. Lucas: Precisely. And you can see this is a different kind of risk premium than, say, the 2019 Abqaiq-Khurais attack, which was a sudden supply outage. This is more like a tariff on transit. It's recurring, it's predictable once imposed, and it's hard to bypass. Luna: Hard to bypass because the alternative routes — like the pipeline from Saudi Arabia to the Red Sea — don't have enough spare capacity to absorb even a fraction of the strait's volume. Lucas: The East-West pipeline can handle about 5 million barrels a day, but it's already mostly utilized. And there's no other major pipeline that can bypass Hormuz for most Gulf producers. So the toll, if implemented, becomes a de facto tax on a huge share of global supply. Luna: Okay, so that explains the crude move. But natural gas is down 4.5 percent in the same period. Henry Hub is at 2.88. Why the divergence? Lucas: Because natural gas is a regional market, not a global one. The LNG trade does connect some markets, but the US is a net exporter of gas now, and most of our production is consumed domestically. The Hormuz toll doesn't directly affect US gas supply or demand. Luna: And the toll would mainly affect LNG tankers going through the strait — which is mostly Asian and European cargoes. US LNG exports go via the Gulf of Mexico, not the Persian Gulf. Lucas: Right. So the gas sell-off is probably about something else — maybe mild weather forecasts, or storage builds, or just rotation out of commodities that aren't getting the geopolitical bid. But the wedge between oil and gas right now is stark. Luna: Let's talk about what this means for inflation expectations. The 10-year breakeven rate is at 2.26 percent, up from 2.24 yesterday. That's a small move, but in the right direction — markets are pricing in higher future inflation. Lucas: And that's the transmission mechanism. Oil is an input to so many things — gasoline, diesel, jet fuel, plastics, transport costs. A sustained $10 increase in crude adds somewhere around 0.3 to 0.5 percentage points to headline CPI, depending on how it passes through. Luna: But core CPI, which strips out food and energy, was already at 336.1 in May. That's up from 335.42. So the underlying inflation pressure hasn't gone away. Oil spike just adds to it. Lucas: Exactly. And the Fed is watching this. The next FOMC meeting isn't until September, but if oil stays elevated and breakevens keep rising, it complicates the path for rate cuts. The market is currently pricing in a cut in September, but this kind of supply-driven inflation is the kind the Fed can't really do much about. Luna: They can't drill more oil. They can only tighten financial conditions, which would hurt demand — but that's a blunt instrument for a supply shock. Lucas: So you end up in this uncomfortable place where the inflation data looks sticky, the Fed hesitates, and the oil spike persists because of geopolitical risk that has nothing to do with domestic demand. Luna: And then there's the clean energy side. The Invesco Solar ETF is down over 3 percent in the last five days. First Solar down nearly 3 percent. Enphase flat. So the oil rally is actually correlated with a clean energy sell-off. Lucas: That's the classic rotation. Higher oil prices historically boost energy stocks — XLE is up almost 4 percent in five days, XOP up 5 percent. But clean energy gets hit because higher rates — which follow from higher inflation — hurt the present value of their future cash flows. Luna: And solar and wind projects are capital-intensive upfront. So a higher discount rate really eats into their returns. Lucas: Yeah. So what you're seeing is a market that's repricing two things simultaneously: the near-term benefit of higher oil prices for traditional energy companies, and the long-term headwind of higher rates for renewable developers. Luna: It's a split that's been going on for weeks, but the Hormuz toll talk just amplified it. Lucas: Let's zoom back to the toll mechanism for a second. Because there's a nuance that a lot of the coverage misses. The toll isn't just a tax on oil — it's also a tax on Iranian exports, which are already under sanctions. So it's partly a way to enforce sanctions more efficiently. Luna: How so? Lucas: If every tanker has to pay a toll and register its cargo, it becomes much harder for Iranian oil to move under the radar. Currently, a lot of Iranian crude goes to China via ship to ship transfers or with falsified documents. A toll system with inspection requirements would make that much more difficult. Luna: So it's both a revenue generator and a sanctions enforcement tool. Lucas: Right. And that's why the toll idea has some support in Washington. It's not just about raising money — it's about tightening the noose on Iranian exports without having to board every tanker. Luna: But it also risks retaliation. Iran has threatened to close the strait entirely if they feel cornered. That's the worst-case scenario. Lucas: That's the tail risk that keeps oil bid. A full closure would take 20 million barrels a day off the market instantly. That's unprecedented. Even a partial closure or a few weeks of disruption would send prices to levels we haven't seen since 2008. Luna: And the Strategic Petroleum Reserve is down to about 370 million barrels — that's less than 20 days of global supply through the strait. So the buffer is thin. Lucas: Yeah. So you've got a market that's pricing in a toll — maybe a dollar or two a barrel — but also adding a premium for the tail risk of a closure. That's what WTI at 79 and Brent at 84 reflect. Luna: It's interesting — you mentioned that walking through the economy with us makes things click for a lot of listeners. And that's genuinely what we try to do here. If you've gotten something out of these episodes, a couple of dollars a month is what keeps them ad-free and independent. You can find us at buy me a coffee dot com slash fexingo. Lucas: Yeah, it really does make a difference. We don't run ads, so listener support is the whole model. And it's not about big amounts — just enough to cover hosting and a little of our time. So if the show has helped you understand something, that's the way to keep it going. Luna: To bring it back to the toll question — what do you think is the likeliest outcome over the next few months? Lucas: I think the toll gets implemented in some form, but at a lower rate than what's being floated — maybe fifty cents a barrel. Enough to raise revenue and signal seriousness, but not so high that it triggers a global economic slowdown. The bigger variable is whether Iran retaliates in a way that actually disrupts traffic. That's the unknown. Luna: And if they do, all bets are off. Lucas: All bets are off. But for now, the market is pricing a manageable disruption. The next few weeks of headlines will tell us if that's too optimistic.