Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Oil Is Spiking While Solar Stocks Keep Falling
Transcript
- Lucas: West Texas Intermediate crude jumped five-point-nine percent in the last five trading days, settling at seventy-two dollars and seventy-one cents a barrel. That rally is the direct result of the US completing strikes on multiple Iranian targets early Wednesday morning. Luna: And yet, the Invesco Solar ETF — ticker T-A-N — dropped seven-point-three percent over the same stretch. Enphase Energy, which makes microinverters for solar panels, fell more than twelve percent. Lucas: Right. So we have this stark divergence. Oil is pricing in a supply-risk premium because the Strait of Hormuz — through which about twenty percent of the world's oil passes — is suddenly back in play. But clean energy stocks are getting hammered, and I think the market is making a subtle error here. Luna: What's the error? That higher oil prices should eventually accelerate the shift to renewables, right? Lucas: You'd think so. But the immediate mechanism is different. When geopolitical risk spikes, investors flee to safety. They sell volatile, growth-dependent names like Enphase and First Solar, and they rotate into the perceived safety of integrated oil majors. ExxonMobil is up three-point-six percent in five days. Chevron up five percent. Luna: So it's a risk-off move, not a fundamental re-evaluation of solar economics. Lucas: Exactly. And there's a second channel: if oil stays elevated, it raises input costs for solar manufacturing — polysilicon, transportation, construction materials. So the near-term margin pressure actually hurts solar companies. That's the narrative the market is trading on this week. Luna: But let's look at the numbers. WTI is at seventy-two seventy-one. Brent is seventy-six fifty-nine. That's a five-dollar spread — wider than usual. Lucas: That spread tells you the premium is concentrated in seaborne crude. Brent, which is the benchmark for globally traded oil, is pricing in the disruption risk to tanker routes through the Strait of Hormuz. WTI is more domestic, less exposed, so it's lower. But both are up sharply. Luna: And the ten-year breakeven inflation rate ticked up to two-point-two-five percent. That suggests bond traders expect higher energy costs to feed through into broader inflation. Lucas: Which complicates the Fed's path. If inflation expectations keep rising, the Fed holds rates higher for longer. That's a headwind for all growth stocks, but especially for clean energy companies that rely on cheap debt to finance large capital projects. Luna: So the clean energy sell-off isn't just about oil risk. It's about the rate regime. Lucas: It's a triple whammy: higher input costs, higher discount rates on future cash flows, and a risk-off rotation away from volatile names. And that's why you see Enphase down twelve-point-seven percent in five days, while the S&P energy sector — XLE — is up two-point-nine percent. Luna: I want to push back a little. If this conflict drags on — say, weeks or months — doesn't the logic flip? Persistent high oil prices should make solar more competitive on a levelized cost basis. Lucas: It should. But markets are notoriously short-sighted. Traders are asking 'what happens in the next quarter?' not 'what happens in the next two years?' And in the next quarter, higher energy costs hurt solar demand because commercial and industrial customers delay non-essential capex. Luna: That's a classic oil-solar decoupling pattern we've seen before. In 2022, when oil spiked after Russia invaded Ukraine, clean energy stocks initially fell before rallying later. Lucas: Right. But the lag was about six to nine months. The Inflation Reduction Act didn't pass until August 2022, and then solar stocks really took off. So the question now is: do we have a similar policy catalyst on the horizon? Luna: Current US policy is uncertain. The IRA is law, but implementation has been slow. And with a divided Congress, there's no obvious new clean energy stimulus coming. Lucas: So the market is left with just the fundamentals: oil up, solar down, and the divergence could persist until either the geopolitical risk fades or inflation expectations force a policy response. Luna: One thing that strikes me — the headline CPI reading for May was 334.0, up from 332.41. Core CPI ex food and energy was 336.1. So core inflation is still running above the headline. Lucas: That's the energy-led inflation story. If oil stays above seventy, headline CPI will be sticky. But core CPI — which strips out energy — might actually moderate. That creates a confusing signal for the Fed. Luna: Speaking of sticky things — I think it is worth noting that this is our hundredth episode. That is a lot of conversations about energy economics, and honestly, the reason we can keep doing it without ads is that a handful of listeners chip in through buy me a coffee dot com slash fexingo. It is a small group, but it is what keeps this show ad-free and gives us the time to dig into these divergences. Lucas: Yeah, it really does. And we are grateful for that. If walking through the economy with us has made something click — whether it is why oil spikes or why solar falls — that support is what keeps it going. No pressure, just a fact. Luna: Alright, back to the divergence. Lucas, you mentioned the Strait of Hormuz. Can you quantify the actual supply risk here? Lucas: Sure. Iran exported roughly one-point-five million barrels per day before the strikes. If even a fraction of that is disrupted, we're looking at a supply loss that OPEC+ spare capacity — mostly in Saudi Arabia and the UAE — can probably cover in the short term. But the risk premium comes from the possibility that the conflict escalates and disrupts tanker traffic through the Strait. Luna: And that's a non-zero probability. The US CENTCOM statement said strikes were on 'multiple Iranian targets' in response to ship attacks in the Strait. That is a direct escalation. Lucas: Exactly. So the oil market is pricing a tail risk. And tail risks are notoriously hard to quantify. The VIX — the CBOE Volatility Index — is probably elevated, though I don't have the exact number in front of me. Luna: The broader point is that solar stocks are not pricing in the same tail risk. They are pricing in higher rates and lower near-term demand. Lucas: And that creates an interesting asymmetry. If the Middle East situation de-escalates, oil should fall sharply — maybe five to ten dollars a barrel — and solar stocks should bounce. But if it escalates, oil could go much higher, and solar could fall further before eventually benefiting. Luna: So for an investor, the question is: do you have the patience to wait for the second-order effect? Lucas: That's exactly the bet. Look at First Solar, ticker f s l r. It is down three-point-five percent this week to two hundred twenty-seven seventy-two. That's a high-quality company with a strong backlog. But the market doesn't care about the backlog right now — it cares about the macro. Luna: And natural gas? Henry Hub futures are at three dollars twenty-eight per MMBtu, up two-point-seven percent. That's a more muted move than oil. Lucas: Natural gas is a domestic market, largely insulated from Hormuz risk. The uptick is probably driven by summer cooling demand and some spillover from oil. But it's not the same story. Luna: So the key takeaway for listeners: don't confuse a risk-off rotation with a fundamental verdict on clean energy. The market is reacting to a specific geopolitical event, not a change in the long-term economics. Lucas: Exactly. And if you're a long-term investor, episodes like this can create entry points — but only if you believe the tail risk will eventually fade or that the second-order effects will kick in. I don't have a crystal ball, but I know that the energy transition isn't a linear process. Luna: It never is. And that's what makes this topic so interesting episode after episode. Lucas: Alright. That's our hundredth. Thanks for sticking with us.