The world is grappling with the largest energy supply shock ever as the Iran war heads toward a fourth month. Asian countries are rationing fuel, governments are emptying their crude-oil stockpiles, airlines are canceling thousands of flights, and Middle East alliances are fracturing.‍

Barron’s convened an all-star panel of energy experts on May 8 to discuss the ramifications for the global economy and investors. This year’s energy roundtable panelists, who met on Zoom, included Lloyd Byrne, head of North American energy research at Jefferies; Helima Croft, head of global commodity strategy at RBC Capital Markets; Seth Kirkham, chief investment officer for global equities at Galvanize; and Dan Pickering, founder and chief investment officer of Pickering Energy Partners.

Barron’s: Thank you, everyone, for joining us at such a fraught and busy time. Helima, you’ve spent many years analyzing energy production in the Middle East. What stage of the war are we in, and has the full impact been felt yet in energy prices?

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Helima Croft: We are in a cease-fire-with-no-oil purgatory. We don’t seem to have material movement toward reopening the Strait of Hormuz [the key energy transportation waterway from the Persian Gulf]. The Trump administration is probably weighing exit strategies and mostly just [planning to stay] the course for a few more months in the hope it can induce Iran to make significant concessions at the negotiating table. But none of the options—negotiation, escalation, or just cutting its losses and getting out—is a path to a quick resolution of the energy bottleneck.

The best-case scenario, which I don’t think we are close to achieving, would be some type of resolution with the Iranians whereby they agree to basically disband the Tehran tollbooth and allow free access to the strait. Even then, it’s going to be a protracted process to bring back oil production. Just de-bottlenecking the strait is going to take a couple of months.

Also, the national oil companies in the region shut down oilfields. Certain countries will be faster to bring back production in a benign scenario. The Saudis will be a three- or four-month story, but the Iraqis have serious physical infrastructure challenges. It could be six months before we start seeing real recovery in Iraqi production. And that is if we get a negotiated opening now.

So, why haven’t oil prices risen more? Crude oil is still trading around $100 a barrel, which isn’t extraordinary from a historical perspective.

Croft: The White House has been exceptional at managing sentiment. It has managed sentiment from the start that this will be a short war. If you had told most market participants on Feb. 28 that we would be talking about a multimonth disruption, with 12.5 million to 13 million barrels of crude lost on any given day, they would have had a much higher price forecast. Now the market is essentially a broken barometer. It’s in no way indicating the degree of risk in the system.

When will prices reflect the truth?

Croft: When we get to summer, it’s going to be harder to paper over the degree of the supply shock. Right now, we are still working off of the 400 million-barrel strategic-stockpile release.

Dan, what is the view from Houston? Do you agree that we haven’t seen the worst?

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Dan Pickering: The amount of complacency around the path we are on is way, way, way too high. What Helima laid out was months and months of continued challenges. We are going to tank bottoms on inventories if that is the case. The price implications are only going to get more obvious over time, and by the time it hits people in the face, it is going to be too late to do much about it.

American energy firms have made a lot of money because of the war. Do they mostly see it as a chance to make a windfall, or are they unsettled because of the volatility in the market and the fact that their end customers are suffering?

Pickering: The unsettling piece for the folks in the industry is that we may have high enough prices that they make a lot of money, but they could have a real demand problem. We could be turning off three million, five million, or even eight million barrels a day of demand. That will be cyclical for a while, but the risk is it could be structural. Do you want to have $80 oil for five years? Or do you want to have $140 oil for a year?

I think the industry would prefer duration. The challenge is that this is the train wreck you can see coming. Frankly, the price signal in the intermediate term isn’t particularly dramatic—it is low-$70s, high-$60s oil, nothing that’s going to spur a huge amount of incremental spending activity [by oil companies]. So, the industry is sitting on its hands.

The other piece that domestic oil companies are worried about is being viewed as profiteers and becoming scapegoats for what is happening, when the reality is that they aren’t getting signals from their investors, from the price, from the marketplace, or the commodity markets to really do much other than see how this plays out.

Will U.S. gasoline prices go above $5 a gallon?

Pickering: How does it not happen? If the globe is short 10 million or 12 million barrels a day of supply, how do you not see higher prices? It is somewhat inevitable. Managing sentiment can be done for a while, but you can’t manage the physical market forever. U.S. prices are somewhat insulated right now, but they are headed higher.

The inevitability of what is happening seems pretty clear for folks in the energy community, because of the timing of all this. If there is a solution to the war soon, then it will take time to bring supply back on. That’s months. The broad market expects a light switch to be turned on. The real shock comes when you try to turn the light switch on and nothing happens.

Lloyd Byrne: I have a question. There is no pressure on the Trump administration [to end the war] because oil prices aren’t going up, right? But if gasoline tops $5 or $6 a gallon and the 10-year [Treasury yield] starts moving higher, won’t there be a forced resolution? Is that what this situation needs?

Croft: I love this question. I don’t know what the pain point for the administration would be, but how do you get out? Do you do a unilateral exit? Then, do you say to countries that depend on the Strait of Hormuz, “You solve this,” and Iran has tollbooth rights? The U.S. unilaterally leaving won’t get us back to Feb. 27.

Are we going to try to force Iran to stop controlling the Strait of Hormuz? That’s what some of our regional allies are saying: “Finish the job.” Are we going to have a massive military deployment? Are we going to try to change the government in Iran? I don’t see a fantastic set of options.

Lloyd, do you agree that the oil price is a broken barometer and the market is irrational?

Byrne: I agree with Helima. I don’t think the proper signals are coming to the market. Prices aren’t high enough yet to hurt demand, but the back of the curve [longer-dated energy futures] just isn’t high enough to incentivize a short-cycle [production] response.

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Seth Kirkham: Don’t we have to ask ourselves why the signals aren’t materializing? It’s usually wrong to stand in your ivory tower shouting out the window that a broad swath of people in the market are mistaken. In my 30 years’ experience in markets—less discreetly focused on oil markets than some of the others here—that has been a dangerous tactic.

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My perception is that things are different this time. During the oil-price shocks in the 1970s and ’80s we had limited alternatives, but still saw high-cost and geopolitically unstable [energy sources] getting kicked off the [price] curve. We used to have oil burners at power plants in the ’70s and ’80s. There were almost none left in developed markets four or five years after the oil-price shocks.

Now we have alternatives. We didn’t need that price signal for Vietnam to cancel a gas-fired power-station project just two weeks after the war started and replace it with a renewable-energy project. We didn’t need that price signal to see significant shifts in the near-term demand for electric vehicles versus internal-combustion-engine vehicles. We are in a different paradigm. Perhaps we were already on the road to substantially lower long-end oil pricing. We have peak oil [demand] in China. China is now importing less oil sequentially year on year.

In the short term, there is the risk of energy price spikes and even curtailments because of the lack of availability. But isn’t this longer-curve price reaction telling us something? We shouldn’t assume the market is wrong.

Is it telling us that the world is going to move off of fossil fuels a little faster because of this?

Kirkham: Precisely.

Pickering: I understand what Seth is saying, but those shifts feel like they will happen over longer periods of time, not as soon as 2027 or ’28. I spend a ton of time worried that I’m in an echo chamber and the market is smarter than me. I hear the bear case—that we are going to be swamped with supply as soon as this war ends. I just don’t know that the [energy] substitution process will happen in the next few years.

Seth, should investors in more-traditional types of energy become more flexible about alternative-energy investments, understanding that there is a shelf life in oil and gas?

Kirkham: That is an inevitability. Oil and gas aren’t going to go away. Most assumptions I have seen for a net-zero type world assume somewhere between 20 million and 50 million barrels a day of traditional energy consumption. But there are good returns on investment in shifting your choice of powertrain from internal combustion engine to batteries, and it’s happening at an accelerating rate. China will consume less oil this year than last year.

I remember “peak oil” conversations 20 years ago. That never materialized. The cost curve of internal-combustion-engine vehicles came down, emerging markets developed more rapidly than people expected, and the penetration of vehicles in very large markets such as India and China got to a point that people didn’t expect. Now, both of those markets are going in the other direction.

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