US Fossil Fuel Reliance and Transition

Podcast has been prepared exclusively. For institutional Wholesale. Professional clients and qualified investors only. as defined by local laws and regulations. Please read other important information, which can be found on the link at the end of the podcast episode. Michael Summelist with an ear April 2026 Eye in the Market podcast. This one's called Salem's Lot. And it is a Gulf War update. Uh some comments on the purge, well shall explain, and also a US fossil fuel Fever dream. over the last few days as I'm as me and everybody else is reading the news on the Gulf War. uh including damage to Gulf State infrastructure, extensive damage to some US Army bases. and and what now looks like effective Iranian control over the Strait of Hormuz. I thought of Stephen King's novel Salem's Lot. Uh the main character in that book journeys to a town called Jerusalem's lot, believe it or not. Best of intentions to fight evil. But things don't quite go according to plan. The towns eventually burned to the ground. Most of the residents are turned into vampires. And everybody ends off w worse than the at the beginning. Um, you know, it'll it'll obviously they take months, if not years, to Evaluate result of this particular conflict. But that's The novel that I thought of. Now. Um Let's get into it. The The the president tweeted recently, go get your own oil, which was directed at at both Europe and Asia. uh in terms of uh advocating for them to to do more to reopen the straight. Um rather than get into what the European and Asian reaction function might be, I thought it was more interesting. to focus on the notion that get your own oil means that the United States is self sufficient. Yes, as you can see from this chart here that we have in the piece. In in contrast to India and Europe and Japan and China. The US is a net order of fossil fuels when you combine them all as a share of primary energy consumption. The U S is a is a net exporter. The problem is global markets, that doesn't shield you from oil and gas shocks nearly as much as you might think. Um This is building on the work that we did. And the last eye on the market. Um, but yes, natural gas prices have not risen in the United States, and that's a pretty big deal. The US is a very large producer and and marginal exporter. Uh look at the rest of the commodity prices here. What we're showing is the commodity price pass through rate to the US. So for example. jet fuel prices in the US have gone up around seventy percent of the increases that have taken place internationally. Even though the United States is a jet fuel exporter. Pastor rates for wholesale gasoline, crude oil, propylene, napha some other petrol chemicals and shipping fuels is over 100%. In other words. For those oil and oil and gas related refined products. Prices have increased in the United States by a larger percent than they've increased internationally. And so this really does, I think put into high relief the limits of the benefits of US energy independents and and that there's only so much of a firewall. that accrues to the United States. from being an exporter. In terms of What's going on in the Middle East, obviously Um most reports suggest that Iranian capabilities have been largely degraded. But if you look at the pa at the at the pace of Drone and missile attacks. They're they're more or less steady. And so, um, whatever those residual capabilities are, they still seem to be uh roughly unchanged over the last month or so. And in terms of US ammunition deployment. the operation Epicur, which is going on right now has just surpassed Operation Iraqi Freedom, which was a little over twenty years ago, in terms of tomahawks that have been used. So in this very short period of time. United States is is used a little more than eight hundred Tom Hawk missiles. Uh which is roughly four times the amount that's expected to be delivered this year. Um And then In terms of some of the things that you read about potential US military offensive operations, whether it's seizing Iran's enriched uranium supplies, seizing Karg Island, seizing Kesham Island. Pay attention to the weather. We have a chart in here that looks at peak temperatures in the Gulf by month. And once you get into May, June, July, you're talking about 120. a hundred and thirty degree peak temperatures. Weird things happen at those temperature levels. Um the Persian Gulf is the world's most thermally extreme marine environment. And once you get to the temperatures you're looking at in June, exposed metal temperatures which absorb heat reach 160 degrees. interior of army vehicles can can reach similar temperatures. radar and communication systems have documente failure rates around these levels. And the and you get to a point where the human body can't even cool itself in the shade. It's quite possible that weather itself will preclude some of these offensive options from being uh uh implemented or considered. once you get through to the end of April or so. And that may be one of the reasons why the administration is reportedly for a way to exit. Um Upon If the if the United States does exit, one of the most interesting things from an economic perspective to watch Is whether Iran will be able to implement their proposed toll on the Strait of Ormuz. Um this is the kind of thing that would have been unimaginable. before the war began, but is now something that's actively being discussed, at least by the Iranians as they're speaking to themselves. Um one proposal I saw from Iran was that they would charge vessels two million dollars. Each. Um, which would if you think about a hundred and forty vessels per day. um three hundred and sixty five days a year. That would amount to a hundred billion in revenues. Now obviously Seems preposterous. Think about this, even if Iran only charged two million dollars. to the two or three thousand commercial vegetals which are current currently stranded in the Gulf. would raise on its own on that one time basis four to six billion dollars. which would match or exceed the annual toll revenues from the largest canals in the world. Panama Canal, the Suez Canal, the St. Lawrence Seaway, the Bosphorus and the Dardanelles. We have a little table in the piece that goes through it. So Um, it will be interesting to see whether Iran, at least with respect to the straight ends up with a more advantageous economic relationship with the world than than when it started. Um and one of the things to watch and this The the next couple of slides are from a presentation. I'll be making it an upcoming um JP Morgan. A defense conference is um There have been some pretty substantial changes in US naval capacity since the nineteen eighties. And we have some charts in here from from from Johns Hopkins and someone from the Naval War College. that shows a sharp decline in in warships in the Gulf. The two charts that are really interesting. Or one. Adding up all the frigates, cruisers, destroys and destroyers and something called a literal combat ship L I T T O R, not L I T E R. Literal. Um and mine hunting vessels, both of which have declined. Um pretty sharply. Mine hunting vessels have gone from twenty one to four. Um And then what's really interesting. is the whole category of frigates. been replaced. with um something called literal combat ships. Which uh Which it turned out to be something of a disaster. Mechanically unreliable, under equipped for high threat environments. unsuited for key missions. Some of the most critical articles I have r ever read. In the history of analysis of military procurements. um our articles. From all points in the political spectrum. criticizing the uh the work that was done and the outcome on these little combat ships. And by the way. Um Those are the ones that also have uh mine clear clearing capabilities that allegedly are gonna replace the mine hunting vessels that the United States has it. I'm sorry if you can hear the sirens. I live in Brooklyn. It's an unavoidable. Uploading in the neighborhood. So um Anyway, um One more thing on this war and and obviously uh the war bet in between Russia and Ukraine. is I think we're all beginning to really appreciate and experience this question of asymmetric warfare. And we have a chart in here that shows the range of both missiles and drones certain Tag or missiles and drones. Paired to their payload. uh in kilograms. and with some data on their unit cost. And what's interesting is that some of these drones now have the same range as Tomahawk missiles and cruise missiles and things like that. Now, their payloads are much lower. costs are even lower than that on a ratio basis to the point where the unit cost per payload for uh missiles is a lot higher than for drum. All of a sudden. You can contemplate a drone swarm. which can accomplish what missiles can accomplish um at a lower effective cost. Um and it also only takes a small drone storm stor the swarm to do a lot of damage too. important infrastructure. So Um, I thought it was an interesting way of illustrating The changing nature of warfare. Um It's hard. You you when you when you're analyzing what's going on, there's a there's a drum beat in the background. kind of hard to ignore. um which are changes in um in the Pentagon. And Uh, you know, it's not unprecedented. I just want to do a little bit of a of a history time capsule, because I think it's interesting. It's not unprecedented for presidents to fire. four and five star military officers. Um it's very rare, but it does happen and there And there are eleven examples that I've found and other people may find others, but there's eleven examples that I found from the Civil War to uh twenty sixteen. And the reasons that four and five star military officers get fired tend to fall into two categories, competence or conduct. So in terms of competence, you're talking about failed military campaigns. Lincoln who fires General McClellan after the Battle of Antietam. Uh FDR fires two admirals after the Pearl Harbor disaster, Admiral Kimmel and Admiral Short. Um, FDR also fires General Fred and all. after the battle of Kasserine Pass in Tunisia, it was the first major engagement between US and Axis forces in 1942 and it was a disaster for the US. And then More recently, Obama fires General McKinnon. for what the administration perceived as a failed military strategy in Afghanistan. five instances of four and five star officers fired for competence. Then you can find Around I found around Six examples uh of four and five star officers' fire conduct. What does that mean? Insubordination. public statements disagreeing with the commander in chief, something called the Article 88 violations under the Uniform Code of Military Justice, um intentional or accidental public disclosure of confidential information. And so you have F D R firing Admiral Richardson and in nineteen forty one, when Richardson correctly argued that the US was not ready for war in the Pacific and who insisted that the fleet return to the mainland. Patton gets fired. due to insubordination, General MacArthur gets fired by Truman for insubordination. and essentially disagreeing with Truman's efforts to try to keep the Korean War limited and avoid shooting war with China. Um, Truman then fired General Denfeld for disagreements over defense cuts. Um And then more recently, um George W. Bush fires General Dugan for disclosing confidential immensation information about Iraq. Airstrike plans. and then Obama fires General Crystal Fair. Criticising Vice President Biden and other officials that shows up and rolling to. So, you know, over a hundred and fifty years or so I found eleven. Um in the last fourteen months. Uh nine. four and five star generals in Bitby. Um, and so uh I think there's al some legitimate questions in terms of where does this end? And what does it portent for the future and is something I think that is worth watching. Okay, last. Last comment. For this podcast. Um And it maybe seemed like a strange time to wonder about this, but I had a fossil fuel fever dream about the United States. Now you might say, Well why would you even think at this moment in time about the US reducing its reliance on fossil fuels? The United States just paid a billion to a French company to transition its investments in the US from offshore wind. And the E V subsidy Ended. And EV sales fell from around nine percent of sales to six percent of sales. earlier this year. Given commodity price shock that we saw on the first earlier in this in this podcast. There are voices that are calling even on the US, despite its energy independence, to trend to accelerate the transition away from fossil fuels. Now to be clear, this is A long road, the United States uses fossil fuels for 85% of its final energy consumption. similar to numbers in places like China. Japan and India. Uh and even in Europe, which is the world's trend energy transition leader. Uh, Europe is still seventy five percent reliant on fossil fuels. So Um but anyway, let's let's take a look at what my dream Add in it. And so. The first thing was A reduction of coal and gas shares of power generation. uh some pretty large declines. Um Um EV is displacing around 30% of the existing combustion engine fleet. Um EVs replacing around twenty percent of the uh internal combustion engine trucks and buses. And then remember the biggest category of energy consumption in most countries is industrial heating. uh and residential heating and commercial heating. And so We assume some very big reductions there of thirty, forty percent. Um in in um fossil fuel based heating. In exchange for heat pumps. And uh ear pumps are uh very efficient. They can con they can convert one unit of electricity into three to four units of heat. Those are great. And solar ratios E Vs can convert. uh energy into motion at four to five times the efficiency of an internal combustion engine card, right? So the the efficiencies work in your favor here. And so what if all of these things happen, all of them. Um What would that mean for the United States? Well Um all the steps happened, it would result in a twenty percent decline. in fossil fuel consumption. Not fifty, twenty. And so I think it's important to kind of understand the math here. It would result in a twenty percent decline in fossil fuel consumption. And would require wind and solar capacity to triple from current levels. And based on the current build out of wind and solar, that would take anywhere from ten to fifteen years. Now for for a country like the US without a carbon tax at a national level. gasoline tax and and declining renewable subsidies, this seems like a really heavy lift. You know, and I I know we're in this kind of anti renewables moment right now from political perspective. You know, the the interesting thing about the Iran War is it highlighted The gap between being a net energy exporter and being immune from global oil and gas shocks. And since that relationship was clearly severed at this point. Eventually I think the pendulum will swing back. uh to at least a partial reacceleration. um uh the energy transition. uh if for no other reason that the United States is is importing Some fairly large. Um uh shocks here, which are gonna be hurting growth and creating challenges for the Fed with threat to inflation. Okay, thanks for listening. I hope The war ends as quickly as the administration says that it might. Uh and that and by the next eye on the market we'll be back to looking at tech sector multiples and the Fed and And um healthcare and and uh some of the other interesting things going on. So thanks for listening and we'll see you soon. Michael Semblist's eye on the market offers a unique perspective on the economy. Current events, markets and investment portfolios, and is a production of JP Morgan Asset and Wealth Management. Michael Semblist is the Chairman of Market and Investment Strategy for JP Morgan Asset Management and is one of our most renowned and provocative speakers. For more information, please subscribe to the Eye on the Market by contacting your JP Morgan representative. If you would like to hear more, please explore episodes on iTunes. 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