Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / The Strait of Hormuz Toll and What It Means for Oil Markets
Transcript
- Lucas: So the big story today — and I mean the kind that actually moves oil markets, not just Twitter — is the Trump administration proposing a 20 percent toll on cargo moving through the Strait of Hormuz, paired with restarting the Iran blockade. Luna: And we saw the futures react immediately. WTI crude futures, the CL contract, jumped nearly 6 percent in the last five days. Brent's up over 6 percent too. Lucas: Right. The Strait of Hormuz is the chokepoint for about 20 percent of the world's oil. So even a proposed toll — let alone an actual blockade — is going to get priced in fast. Luna: But this isn't a new blockade, right? The administration had already been tightening pressure on Iran. This feels like an escalation. Lucas: It is. The previous approach was more about sanctions enforcement. This is a direct physical intervention — a toll on every tanker that passes through. And the market's treating it as a supply disruption risk, because that's exactly what it is. Luna: So let's talk about what that means for the actual prices we're seeing. WTI crude at $69.60 as of last week, Brent at $69.60 too — that's before this latest jump. Where do we think this goes? Lucas: Well, the futures are already pricing in a risk premium. CL at $77.77, Brent at $82.78 — that's a decent premium over the physical spot. But the real question is whether this becomes a sustained disruption or a negotiating tactic. Luna: And the toll proposal — 20 percent — is huge. That's not a small fee. It would directly increase the cost of every barrel that moves through the strait. Lucas: Exactly. If implemented, it would basically act like a tax on global oil supply. And it would hit Asian refiners hardest, because they're the biggest buyers of Middle Eastern crude. But US consumers would feel it too, because oil is a global market. Luna: Meanwhile, the energy stocks are rallying. XLE, the energy sector ETF, up 4.1 percent in five days. XOP, the exploration and production ETF, up 5.2 percent. But it's not uniform. Lucas: No, it's not. Look at the big integrated majors — Exxon up 2.3 percent, Chevron up 4.5 percent. But ConocoPhillips, which is more of a pure-play driller, up 4.1 percent. The refiners might actually benefit from the toll if it widens cracks, but that's complicated. Luna: And then there's the clean energy side. ICLN, the global clean energy ETF, down 3.4 percent. TAN, the solar ETF, down 2.8 percent. First Solar down over 3 percent. So the old oil-renewables divergence is still playing out. Lucas: It's almost like the market is saying: geopolitical tension means higher oil prices, higher oil prices mean more drilling, more drilling means less urgency for renewables. But that's a very short-term view. Luna: Well, it's also a reminder that energy transition doesn't happen in a straight line. Every time oil spikes, there's a temptation to delay the shift. But structurally, the economics of solar and wind keep improving. Lucas: Right, and that's the tension. In the near term, this blockade could push oil higher, which would feed into inflation. The CPI already ticked up to 334 in May, core CPI at 336.1. Higher energy costs would put pressure on the Fed. Luna: And we just had Fed Governor Waller saying the Fed shouldn't 'fight the last war' on inflation, but hikes are still possible. So this oil spike comes at a tricky moment. Lucas: Exactly. If oil stays elevated, it could slow the disinflation process. The 10-year breakeven inflation rate is already at 2.24, up slightly. So markets are pricing in a bit more inflation risk. Luna: Let's step back for a second. This show — the way we walk through the economy and energy markets — it's only possible because of listener support. We keep it ad-free, and a couple of dollars a month genuinely makes a difference. Lucas: Yeah, if you've gotten something out of these episodes, buy me a coffee dot com slash fexingo is the place. It's what keeps us going, no pressure. Luna: Absolutely. And now back to the strait — because there's a lot more to unpack. Lucas: So the other thing to watch is how other producers respond. If the strait gets blocked or tolled, Saudi Arabia, Iraq, Kuwait, UAE — they all export through there. They'd have to find alternative routes, which adds cost. Luna: And the US is a net exporter now, so higher global prices actually benefit US producers. But it also means higher gasoline prices for American drivers. Regular gas was already at $3.78 a gallon, down from $3.83, but that could reverse. Lucas: Yeah, gasoline futures are probably going to move with crude. And the refining margin could widen if crude supply is disrupted but product demand stays steady. That's why refiners might outperform drillers here. Luna: But the drillers — like Conoco, Pioneer, Devon — they benefit from higher oil prices directly. So why aren't they rallying more? Lucas: Part of it is that the blockade is more of a near-term shock. Drillers are more exposed to long-term price expectations. If the blockade is resolved quickly, prices could fall back. So the market is pricing in some probability that this doesn't last. Luna: And the administration's proposal is just that — a proposal. It's not enacted yet. So there's uncertainty. Lucas: Right. And historically, the Strait of Hormuz has been threatened before. In 2019, after the attacks on Saudi Aramco facilities, prices spiked but then came down. The market has some memory of that. Luna: But this time it's different because it's the US government imposing the toll, not a non-state actor. That makes it more deliberate and potentially more durable. Lucas: Exactly. It's a policy tool, not a random event. So the market has to assess how committed the administration is. And given the track record of this administration on Iran, the odds of escalation are non-trivial. Luna: So what should an investor do? Not advice, but how should they think about this? Lucas: I think the key is to distinguish between the short-term noise and the structural trends. Oil is going to be volatile as long as this strait issue is unresolved. But the long-term case for renewables hasn't changed — if anything, geopolitical instability reinforces the need for energy independence. Luna: And energy independence means diversifying away from chokepoints like Hormuz. That's good for US oil production, but also for solar, wind, batteries. Lucas: Right. So you might see a knee-jerk sell-off in clean energy stocks, but the fundamentals — falling costs, policy support, corporate demand — are still there. The question is timing. Luna: And on the oil side, the toll could actually accelerate the shift if it pushes prices high enough to make alternatives more competitive. Lucas: That's the irony. A 20 percent toll is designed to pressure Iran, but it also raises the cost of oil for everyone. And higher oil prices are the best advertisement for renewables. Luna: So the divergence we've been seeing — oil up, clean energy down — might not last forever. At some point, the math flips. Lucas: Exactly. And that's the kind of thing we'll keep watching. For now, the immediate story is the strait. We'll see how the administration follows through. Luna: And we'll be here to walk through it. That's it for this episode of Energy Economics. Lucas: Thanks for listening, and we'll catch you next time.