Navigating the Implications of Higher Energy Prices

Thomas Shipp (00:00):

The energy market has been front and center for all of us lately, between the headlines coming out of the Middle East and the prices we're seeing at the pump, there's a lot to unpack in this edition of LPL Street View. We'll take a few minutes explaining why the war in Iran has pushed energy prices higher. Why we believe the impact on the U.S. economy is likely to be limited, and where we still see opportunity for investors in the energy sector. Let's start with the obvious question. Why have oil prices spiked? The short answer is uncertainty around supply. The conflict has created direct supply disruptions and introduced a high level of geopolitical uncertainty that naturally puts upward pressure on oil prices. When supply chains in the Middle East are at risk, the market preemptively prices in that volatility, and that's exactly what we've seen over the last few weeks.

Thomas Shipp (00:49):

And this is not just about crude oil itself, it's also about the broader energy system, how oil moves around the world, how it gets refined, and how finished products ultimately reach consumers. In times of geopolitical stress, those systems can tighten fast, and that's often why energy prices react so sharply to headlines. Now that sounds concerning and it is something we're watching closely, but here's the key point. Higher oil prices do not hit the U.S. economy the way they used to. There are two big reasons for that. First, the U.S. economy is much less oil intensive than it was decades ago. In simple terms, we use less oil per dollar of economic output than we used to. That means oil shocks don't carry the same economic punch they once did. To put it in perspective, oil prices would likely need to exceed $200 per barrel before the economic weight of energy expenditures reached the level seen in 1980.

Thomas Shipp (01:45):

Second, the U.S. is now a major energy producer and a net exporter of petroleum products. That's a very different setup than in the 1970s and 1980s when the country was far more exposed to imported oil shocks. Today, higher oil prices can still raise prices at the pump and add pressure to inflation, but the U.S. economy has a much bigger built-in buffer than it used to. Our view is that for oil prices to seriously damage the broader U.S. growth outlook, prices would need to move much higher and stay higher for longer than what we've seen so far. So to be clear, we are not broadly bearish on the U.S. economy simply because oil prices have moved up. At the same time, we are growing more constructive on energy equities, and that's an important distinction. You can believe the economy remains resilient while also believing energy company stocks may continue to perform well.

Thomas Shipp (02:35):

Why? Because energy stocks don't need the whole economy to weaken in order to benefit. They need supportive industry conditions. And right now, some of those conditions remain in place. In our recent Beyond the Numbers note, we argued that this cycle may look different from past energy booms in prior cycles. Higher oil prices often led to a rapid surge in drilling and supply. This time supply may respond more slowly because companies are showing more capital discipline. Financing is more expensive, and a larger share of new supply may need to come from longer cycle international projects That matters for investors because it can support cash flows and returns for energy companies. So where do we think the more interesting opportunities may be? Broadly, we would focus less on the most speculative, highly leveraged oil producers, and more on companies with durable cash generation, strong balance sheets and operational advantages that can include large integrated energy companies, which benefit from scale and diversification. It can also include parts of the energy ecosystem tied to bottlenecks, areas like refining capacity offshore and sub-sea development, and select oil field services where pricing power can emerge.

Thomas Shipp (03:43):

So the bottom line is this. The war in Iran has pushed oil prices higher because markets are pricing in supply risk, but the U.S. economy is less dependent on oil than it was in prior decades, which is why we believe the growth impact should be limited unless the shock becomes much larger or much more prolonged. And at the same time, yes, we do think areas of the energy sector can still be attractive in this environment. If you'd like to learn more, we've recently published three pieces of research that dive into these details. The March publications of Beyond the Numbers and Economic Navigator, and the Weekly Market Commentary from March 16th, "Why Oil Prices Matter Less". Please check out our research content on LPL.com for a deeper look at the data. Thank you for joining us for this edition of LPL Research's Street, but we'll continue to watch the markets closely so you don't have to see you next time.