Investors brace themselves for a future of higher oil prices

"For us, it doesn't matter if the Strait of Hormuz never opens again" Pippa Malmgren, a US entrepreneur and former US presidential adviser told an audience of UK investors at Morningstar's annual Investment Summit in London last week. 

Her optimism went down like a lead balloon full of investors anxious about the long-term impact of the Iran war. Beyond the stereotypes of British pessimism versus American optimism, the disconnect illustrated the rapidly changing geopolitical realities, with the US economy having so far been rapidly sheltered from the coming energy shock, while the UK, importing more than 40% of its energy, is a lot more exposed to global price shocks. 

With nearly a quarter of the world's oil and gas supply being shipped through the Strait of Hormuz, the IEA has warned  last month that a sustained closure could spark the "worst energy crisis in history."

In contrast, the US has established itself not just as a major oil producer, but in recent weeks also as a key supplier to Asian economies who were previously reliant on oil and gas transported through the strait of Hormuz. 

Malmgren, a picture of US optimism, predicted that despite geopolitical tensions and the cut off of about 20% of the world's oil and gas supply, the world continued to move from a scarcity to an abundance economy with AI innovation and tokenisation of financial assets paving the way for a new era of innovation. 

US dominance set to prevail – but China counters it 

Her optimism was countered by a more sceptical Anna Rosenberg. Amundi's head of geopolitics warned that the US was now a hegemonic power which had overstretched itself, both financially and militarily. "Trump is trying to halt this decline by increasing economic independence, ironically a lot of these moves have eroded trust in the US accelerated the trend of decline" she warned. 

Rosenberg spoke of a "schizophrenic policy environment where huge geopolitical uncertainty and the growth story of AI" emerged at the same time. Indeed, despite this challenging long-term outlook for the US, stock market indices tell a different tale, with the S&P500 up by almost 8%, despite the geopolitical turbulences. 

Many investors see the US as relatively immune from the coming global energy shock due to its new role as a net oil exporter and its dominant role in the AI race, she acknowledged. "Mythos could help cement the US superpower status a lot depends on how the AI race pans out" she predicted. 

Her views were shared by Wei Li, global chief investment strategist at BlackRock, who revealed that the $14trn manager remains overweight US equities, specifically because of its relative competitive advantage in computing and data centres. 

However, she also added that China holds a relative advantage in the fact that its data centres tend to be more reliant on renewables and are therefore more sheltered from future price shocks.

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Johanna Kyrklund, CIO at Schroders agreed, adding that the UK manager also favoured the US across its multi-asset portfolios, due to the relative resilience to rising oil prices. She predicted that breakdowns in global supply chains meant that the world economy was now heading towards a stagflationary scenario. 

She stressed that China remains a key counterweight to the US due to its control over rare earths which will play a vital role both in the AI rollout and the global energy transition.  "China is a market you can't ignore" she predicted. 

Oil- still a cheap commodity
While Malmgren's speech went into little detail about the energy sources fuelling this transformation to "an economy of abundance", Will Riley, portfolio manager for the Guinness Global Energy Fund provided a more detailed perspective on the long-term impact for global energy markets. 

Guinness offers its investors funds which exclusively invest in the oil and gas sector, alongside more transition focused strategies, making investors such as Riley a somewhat agnostic observer on the global energy transition. 

Riley predicted that the global energy crisis will in the first place lead to a greater focus on energy security, which in the medium term could lead to an increase in oil and gas prices as successive governments will rush to refill their depleted oil and gas stockpiles. 

However, he also argued that oil today remained a "relatively cheap commodity" and that the world economy could withstand a situation whereby global oil prices would rise above $150 a barrel for some time, mainly because oil now takes up a much smaller share of global GDP than during previous oil price shocks. 

Guinness estimates that oil now accounts for less than 3% of GDP, compared to 4-8% during the 1970s with the scaleup of renewables emerging as a counter weight. 

Having said that, he also pointed out that up to 1-2% of global oil supply was now permanently impaired as a result of the crisis. "Oil wells are pressurised systems, at some point, it becomes uneconomic to bring them back into action, we estimate that one or two million barrels of global oil supply won't come back to the market" he said. 

An inflection point 

Over the longer-term, there is however a key paradox of the heart of the US tech expansion, Riley argued, stressing that the US would need to drastically scale up its electricity production. "Trump wants to do this by expanding oil and gas production but these are assets with pretty long development times, batteries, wind and solar can be rolled out far more quickly, he argued. 

However, the crisis is likely to accelerate the pace of the transition, he believed: "We are at an inflection point around the world this is not just about data centres, this is the electrification of industry electrification buildings commerce transportation" he argued.

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