The script did not change last week. Equities remained resilient, but oil investors were wary. Although the AI sector wobbled occasionally, the South Korean equity index staged a robust rebound on Friday. The eagerly awaited US jobs report showed an increase of just 57,000 jobs in June, well below expectations. When disappointing labour market data are coupled with lower inflation expectations driven by cheaper energy, monetary luminaries will think twice or even thrice before contemplating an increase in the cost of borrowing. The need to raise interest rates is diminishing almost as rapidly as oil prices and is therefore unlikely to impede the current bull run in equities.

There has been relative calm in the Middle East, much to the delight of those betting on lower oil prices. As the fragile ceasefire continues to hold, notwithstanding the random skirmishes, oil volumes transiting the Strait of Hormuz are increasing almost by the day. Over the weekend, Iran and Qatar resumed maritime trade. Iraqi oil exports totalled around 24.5 million barrels in June, while seven OPEC+ members, partly legitimising their efforts to compensate for lost output and exports during March and April, agreed to increase their production quotas by a further 188,000 bpd from August. They are selling into a falling market, offering little hope of an imminent price recovery. However, lower oil prices will undoubtedly stimulate demand further down the line.

Paradoxical Times

The Iranian crisis and the volatility it has brought have provided ample opportunities for market participants to trade on the tension and the resulting disruption to oil supplies. Most have been handsomely rewarded. Over the longer term, however, the impact of the Iranian conflict may hasten the transition from fossil fuels to renewable energy. Considering that, within the space of four years, the world has had to contend with two major energy crises, the Russian invasion of Ukraine and, more recently, the latest chapter of instability in the Middle East, the issue of energy security has inevitably become more relevant. Conventional wisdom would suggest that, during periods of oil scarcity, renewable energy should increasingly become the focus of policymakers, investors, and consumers alike. Anecdotal evidence, however, suggests that this logic does not necessarily or fully apply to the current crisis.

This is not to say that renewable energy is not viewed as one of the alternatives. Rather, it is becoming increasingly apparent that it is not the only one. A useful comparison may be the 1973 oil crisis. The oil embargo imposed by Middle Eastern OPEC members on countries that supported Israel during the Yom Kippur War provided a renewed impetus to the development of nuclear energy while simultaneously encouraging the development of North Sea oil fields. Fast forward 53 years, and efforts across the region to revive plans for alternative oil transportation routes are gathering pace. While Saudi Arabia has successfully utilised the East-West Pipeline to keep its oil flowing to global markets, its neighbour, the UAE, plans to double the capacity of its existing pipeline, which bypasses the Strait of Hormuz, to 3.6 mbpd by the end of next year.

At the same time, investment in exploration and production has also received a timely boost. Iraq, for one, is seeking a higher OPEC quota and plans to raise its production capacity from 4.9 mbpd to 7 mbpd. As noted above, energy infrastructure is being expanded to bypass the region's critical chokepoint. Consultancy Rystad Energy expects exploration spending to exceed the $1 billion mark this year. These projects have been driven not only by crude oil prices rising above $100/bbl in March and April but also by the desire to improve the security of oil supplies. In light of these developments, it comes as little surprise that coal consumption, particularly in Asia, has also increased.

At the same time, both the use of and investment in alternative energy have risen significantly as a result of the Hormuz crisis. According to Zero Carbon Analytics, the energy shock prompted more than 20 countries to announce clean energy measures aimed at insulating their power grids from dependence on fossil fuels. Billions of dollars have been earmarked for renewable power generation in the name of diversification and protecting economies from the adverse effects of geopolitical upheaval. Hostilities between Iran and the US triggered a surge in demand for solar panels and heat pumps, particularly in Europe. Goldman Sachs estimates that global electric vehicle (EV) sales in May were 3.4% higher than in February, accounting for a record 26.1% of total car sales. The bank reckons that the resurgent popularity of EVs could reduce global oil demand by as much as 320,000 bpd next year. It is becoming apparent that alternative energy is viewed not only as the most effective means of addressing rising global temperatures but also as an essential way of ensuring a secure and reliable energy supply.

Some would argue that the Iranian conflict has proved an unmitigated disaster for the US, while others would vehemently disagree. What is becoming increasingly evident, however, is that the war has created powerful incentives to accelerate the energy transition, the exact opposite of the current US administration's energy policy. While Washington is doubling down on fossil fuels, other nations, most notably China, are emerging as leaders in alternative energy. The short-term benefits of relatively inexpensive oil are likely to fade over time, ultimately giving way to a loss of competitiveness. Countries that remain heavily dependent on oil will also be more vulnerable to wars and geopolitical tensions than those that diversify their energy mix. In the words of environmentalist William McKibben, "Sunlight travels 93 million miles to reach the Earth; none of them through the Strait of Hormuz." The latest conflict has done little to curb the world's appetite for oil in the short term, but it is likely to accelerate the transition away from fossil fuels in the years beyond 2030.

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