Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Oil Jumps as Mideast Tensions Reshape Energy Markets
Transcript
- Lucas: Oil just ripped 8 percent higher in five days. WTI crude hit 74 bucks a barrel this morning, and Brent is creeping toward 78. Luna: That's a big move. And it's not about OPEC or inventories — it's about bombs dropping on Iran. Lucas: Exactly. Overnight, the U.S. launched what it called 'powerful strikes' against Iranian targets. The headline alone sent crude futures spiking. And this comes after weeks of rising tension around Iran unlocking exports at a premium — something we talked about a few episodes back. Luna: Right, Iran was already selling oil at a 20 percent premium to circumvent sanctions. Now you've got actual military action. That's a whole different risk category. Lucas: And look, if walking through the economy with us has made something click for you, I'll just say — a handful of listeners chip in monthly on buy me a coffee dot com slash fexingo. That's literally what funds making this many episodes without ads. No pressure, ever. Just a fact. Luna: Yeah, it keeps the lights on. Appreciate every one of you who does. Anyway — back to oil. Lucas: So the question is: how much of this move is real supply disruption, and how much is just fear? Right now, there's no actual blockade. Iran still exports about 1.5 million barrels a day, mostly to China via 'gray fleet' tankers. But the risk of a strait closure or a broader conflict is now priced in. Luna: And that risk premium can vanish just as fast. But historically, when the U.S. directly strikes Iran, oil stays elevated for weeks. The Gulf War and the 2020 Soleimani strike both saw 10 to 15 percent jumps that took months to fade. Lucas: Right. Meanwhile, clean energy stocks are getting crushed. Enphase is down almost 13 percent in five days. First Solar off 3.5 percent. The ICLN clean energy ETF is down nearly 6 percent. Luna: That's the weird part. You'd think higher oil prices would make solar more competitive. But that's not how the market is trading it. Lucas: It's a risk-off rotation. When a geopolitical shock hits, investors sell the stuff that's already fragile — and solar has been fragile. High interest rates, policy uncertainty, inventory gluts. First Solar's earnings per share growth has slowed, and Enphase is still dealing with a European demand slump. Luna: So oil spike actually accelerates the sell-off in renewables because it's a reminder that the world still runs on fossil fuels when things get scary. Lucas: Exactly. And that's the disconnect the market lives in right now. On paper, higher oil should boost solar's relative economics. In practice, it triggers a flight to safety, and solar isn't safe. Luna: What about natural gas? Henry Hub is up 4.7 percent this week, to 3.35. That seems modest compared to oil. Lucas: Gas has its own dynamics. It's more domestic in the U.S., so Middle East tensions don't directly affect supply. But if oil stays high, some power plants might switch from oil to gas, which could push prices higher. Also, it's July — heat waves drive cooling demand. We're seeing that in the PJM grid, which we talked about recently. Luna: Right, PJM had to take emergency actions during the heat wave last month. That's a structural thing: grid reliability concerns are boosting gas demand regardless of geopolitics. Luna: Which makes it hard for a diversified energy investor to know what to do. The XLE energy ETF is up 2.9 percent this week. The XOP exploration and production ETF up 2 percent. But those are oil heavy. Lucas: And if you look at the stocks beneath the surface, ExxonMobil up 3.6 percent, Chevron up 5 percent, ConocoPhillips up 4.3 percent. That's a clean oil rally. Meanwhile, NextEra Energy — the big utility with renewables — is flat, up 0.8 percent. It's not participating. Luna: So the signal is: oil is having a moment, but it's a moment driven by fear, not fundamentals. And the clean energy sector is stuck in a downtrend that started long before this week. Lucas: I'd add one more layer. The inflation picture. CPI is at 334, up from 332 a month ago. Core CPI is 336. You get an oil spike like this, and it feeds into headline inflation. The 10-year breakeven inflation rate ticked up to 2.25 percent yesterday. That's the market saying this might not be transitory. Luna: Which matters for the Fed. If oil stays at 75 or goes to 80, it could slow down rate cuts. That's another headwind for solar — higher rates for longer. Lucas: Exactly. So the clean energy sell-off isn't irrational. It's a rational repricing of a sector that benefits from low rates and stable policy, and it's getting neither. Luna: One thing I'm watching: if the strikes escalate and Iran retaliates by disrupting tanker traffic through the Strait of Hormuz, oil could go to 85 or 90. That would be a whole different ballgame. Lucas: About 20 percent of global oil passes through Hormuz. If that gets pinched, you're talking about a supply shock that dwarfs anything we've seen since 1973. But that's a tail risk. The base case is still that this de-escalates. Luna: And in that base case, oil probably settles back to 65 to 70, and clean energy stocks still have to deal with their own problems. Lucas: Right. So the takeaway for today is: don't confuse a geopolitical spike with a sector rotation. Oil's up because of bombs, not because the world suddenly loves fossil fuels more. And renewables are down because the macro environment is hostile, not because solar technology got worse. Luna: That's a good frame. I'd also say: if you're long clean energy, this is painful, but the thesis hasn't broken. It's just being tested. Lucas: Yeah. And for oil investors, enjoy the pop, but keep one eye on the exit. Geopolitical risk premiums can evaporate overnight. Luna: Alright, let's leave it there. We'll be watching the headlines closely. Lucas: Next episode, we'll look at what this means for gasoline prices at the pump — regular is already down to 3.78 from 3.83, but that could reverse if crude stays high. Luna: See you then.