A Global Energy Crisis Is Here
Inside today’s Daily Journal…
Essay: A Global Energy Crisis Is Here
The Iran war helps energy stocks
Fund managers run for cash
Another hit on private credit
Chart Of The Day… Consumer Credit Index
Today’s Mailbag – A lively one
The Iran conflict is quickly approaching the point of no return.
Previously, both sides of the conflict – the U.S. & Israel versus Iran – were, for the most part, avoiding strikes on critical energy infrastructure.
But that changed yesterday when the Israeli air force bombed Iran’s South Pars Field – the country’s largest gas resource, responsible for 75% of its natural gas production. Iran vowed to retaliate by striking energy infrastructure across the Middle East, and it wasted no time making good on that threat. Within hours, it launched a series of ballistic missiles into Qatar, Saudi Arabia, and the UAE.
The most devastating blow landed on the Ras Laffan industrial complex in Qatar, which hosts the world’s largest liquefied natural gas (“LNG”) plant. This $70 billion LNG facility is responsible for 25% of global LNG exports, and took 14 years to build. But it only took 24 hours to engulf it in flames, as captured in this video of the initial strikes (another barrage was launched several hours later). The QatarEnergy CEO noted that the damage will likely result in a loss of 12.8 million tons per year of LNG for three to five years, or around 17% of the facility’s total capacity.
That loss of production could be just the beginning if the escalation continues. Following the attack on its South Pars gas field, Iranian officials noted: “We warn the enemy that you made a major mistake by attacking the energy infrastructure of Iran… the next attacks on your energy infrastructures and that of your allies will not stop until their complete destruction.”
This marks a critical turning point in the conflict.
Up until now, it was possible – at least in theory – to avoid an unprecedented energy catastrophe. A ceasefire agreement could have opened up traffic through the key Strait of Hormuz, immediately restoring oil and gas shipments out of the Persian Gulf and into global markets. But with strikes on energy infrastructure no longer off-limits, we run the risk of an irreversible descent into a crippling energy shortage.
The world’s largest concentration of oilfields, pipelines, and export terminals are within striking distance of Iran’s drone and missile arsenal. And if the conflict escalates, one potential end game is the destruction, not mere disruption, of 20% of global oil and gas supply. That’s a problem that a peace deal can’t fix overnight.
In this scenario, there would be only one mechanism left to balance the market: demand destruction. Prices would need to rise high enough to wipe out a huge chunk of global energy demand. It’s anyone’s guess what that world looks like, but crude oil trading at $200 per barrel and natural gas prices of $20 per thousand cubic feet is well within the realm of possibilities.
And that’s a recipe for a global recession.
So what does this mean for you and your financial well-being?
Let’s use history as a guide.
The last time the world faced an energy shortage anywhere close to this magnitude was in the 1970s when a series of oil embargoes from the Middle East choked off about 7% of global oil supply – compared to 20% today. Then, like now, the U.S. economy was already reeling from several years of sky-high inflation. Rising energy prices pushed an already-weak economy over the brink, giving birth to the 1970s stagflation: a one-two punch of economic stagnation and high inflation.
Nearly every asset class suffered negative real returns, leading to a lost decade for investors.
But there was one big winner from that environment: energy stocks, which earned windfall profits as oil prices skyrocketed from $4 per barrel to as high as $40 during the decade:
Given the risks of a repeat performance from today’s energy crisis, we view energy stocks as the ultimate “must own” portfolio hedge.
And there’s one area of the world that offers geopolitical stability, a friendly regulatory environment, rock-bottom breakeven costs, and decades’ worth of future reserves: the Permian Basin in West Texas.
The Permian is the most valuable energy production zone in the world. Each day, it churns out 6.6 million barrels of oil, or about half of the U.S. total. If the Permian were its own country, it would rank as the fourth-largest oil producer, just behind Russia. And it’s one of the lowest-cost oil basins in the world, with breakeven rates as low as $40 per barrel in the most productive regions. When it comes to owning energy stocks, accept no substitute.
We’ve previously recommended oil-and-gas royalty company Viper Energy (VNOM) as our favorite way to play the Permian basin. As a royalty business, Viper simply owns the land that other companies drill on. That means low overhead, low capital requirements, and world-class margins.
Our standard screening threshold for finding high-quality businesses are those capable of converting at least 10% of sales into free cash flow, or a 10% free cash flow margin. Viper’s capital efficient business model boasts an incredible 60% free cash flow margin.
Plus, it offers one of the most compelling growth stories in the energy market. Since going public in 2014, the company has increased its royalty volumes by 29x from 3,000 barrels of oil equivalent (MBoe/d) to 91,600 MBoe/d last year. That works out to an annually compounded growth rate of 36%.
The best part: even after a 22% rally year-to-date, the shares haven’t come close to pricing in an energy bull market.
Even assuming the most downbeat energy-price scenario, where oil averages $60 per barrel, the business will generate over $1 billion in free cash flow this year. Trading at a current market capitalization of just $16.5 billion, Viper is valued at around 16x free cash flow, or a 50% discount to the S&P 500.
We don’t expect this discount to last for long, especially if today’s high-price environment persists. In the meantime, we get paid a 4.4% dividend while we wait. Importantly, this current dividend rate is based on the Q4 financial results, when oil traded for $60 per barrel. With oil now close to $100 per barrel, Viper stands to earn windfall profits that will flow directly back to investors through a higher dividend payout.
The company also stands to benefit from rising gas prices in the Permian Basin. Roughly half of Viper’s royalty revenue comes from oil, with the other half coming from natural gas and natural gas liquids (“NGL”). Big Tech companies are flocking into West Texas in order to capitalize on the abundant supply of natural gas, the key fuel used in powering their energy-hungry data centers. This includes OpenAI’s flagship data center for the $500 billion Stargate Project, along with dozens of additional projects currently in various stages of development.
As a result of this data center boom, a record jump in 60 gigawatts (“GW”) of gas-fired power plants were added to the development queue in Texas last year alone. That’s more than the next seven states combined:
Pipeline operators have announced plans to build 10 billion cubic feet per day (Bcf/d) of capacity to move gas out of the Permian basin to other high-demand centers around the state by 2030. For perspective, that represents 40% of the 25 Bcf/d of current gas production in the Permian basin. That means we can count on both higher gas production, and higher prices from Viper’s gas royalty stream.
And that’s just one part of a broader theme we’ve reported on called the AI HALO trade: companies with hard assets, and low obsolescence risk. These companies own the land, water rights, energy, and other critical materials going into today’s artificial intelligence (“AI”) build-out. They’re not only disruption-proof, but they’re on the receiving end of trillions of dollars of capital flowing into the AI revolution.
And all of these assets just became a lot more valuable following the geopolitical shock. Each of these businesses owns irreplaceable assets located in America, insulated from the energy and supply chain disruptions from the conflict in the Middle East. We’re convinced this will be the biggest trade of 2026, offering one of the few sources of positive returns in a turbulent macroeconomic backdrop.
Tell us what you think of today’s Journal: [email protected]
Good investing,
Ross Hendricks
Houston, Texas
Venture Capitalist: How To Make Significantly MORE Than SpaceX IPO Investors
When SpaceX IPOs, you should be SELLING instead of buying.
A prominent venture capitalist, and recent Black Label guest is revealing how to get SpaceX exposure — before it hits the public markets.
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3 Things To Know Before We Go…
1. The Iran war is escalating. Israel struck Iran’s South Pars gas field on Wednesday, prompting Tehran to retaliate with missile strikes on energy infrastructure across Qatar, Saudi Arabia, and the UAE. As detailed above, the most significant damage was to Qatar’s Ras Laffan facility – responsible for roughly 20% of global LNG. Reuters reports the damage could take three to five years to repair. Meanwhile, the Strait of Hormuz – through which one-fifth of the world’s oil normally flows – has seen traffic drop 97% since the war began on February 28. Brent crude oil briefly spiked above $119 today before settling around $110, and European natural gas prices surged more than 16%. While this is terrible news for the global economy, it’s been a boon for our Complete Investor recommended energy stocks, which (as the chart above shows) are now up an average of 48% year to date.
2. Investors move into cash. With no end in sight to the war in Iran, global fund managers have moved into cash at the fastest rate since the March 2020 COVID-19 shock, with average holdings jumping from 3.4% to 4.3% in a single month, according to the latest Bank of America Global Fund Manager Survey. The stark reversal of the bullish sentiment seen in January has sent many investors to seek safety in gold and short-term fixed-income assets until geopolitical clarity returns.
3. The private-credit spiral won’t stop spinning. Rating agency S&P Global just cut the outlook on private-credit lending firm Cliffwater to negative on its $32 billion flagship fund. Investors tried to pull 14% of shares in Q1, but Cliffwater honored only half of them. And now the contagion is spilling into consumer lending. Stone Ridge’s Alternative Lending Risk Premium Fund, which holds buy-now-pay-later (“BNPL”) loans from Affirm, personal loans from LendingClub and Upstart, and merchant financing from Block and Stripe, is meeting just 11% of redemption requests. The liquidity crisis is bleeding from private credit into consumer lending – just see Porter & Co.’s Consumer Credit Index below.
Chart Of The Day… Porter & Co. Consumer Credit Index
The Porter & Co. Consumer Credit Index (CCI) is a 10-stock equal-weight basket tracking the U.S. consumer credit default cycle across BNPL, subprime auto, subprime personal lending, and used auto retail – indexed to 100 from October 2022. CCI is now tracking near its March 2025 level, giving back the entire post-tarriff recovery.
Mailbag
“Other Countries Are Not Better At Producing Things – They Just Manipulate Their Currencies And Wages”
Kevin O. writes:
“Free trade” is dumb. “Equal trade” is better economically.
Other countries are not better at producing things than we are. They just manipulate their currencies and suppress their wages so they can produce products more cheaply. It has nothing to do with being better at things.
What happens when China and everyone else who doesn’t really like us cuts us off from vital resources and products – like rare earths or medicines? You’re telling me that just because they produce them cheaper, we have to rely on them? We can’t be in a position to be held hostage by other countries over “free trade.”
You say it all the time: our money is being inflated away by the government’s money printing. Our future is mass unemployment and poverty. I could compile an archive of essays and research you have sent me, telling me to prepare for a future with mass unemployment, monetary collapse, hyperinflation, and the dollar losing its reserve currency.
All because of free trade, apparently. Cause that’s what we have had for the last 80 years. All these financial problems the country has had have happened under free trade. Walk around Detroit, where I’m from, and tell me free trade has been great for America. Free trade has hollowed out our industrial base and ability to produce things vital for national security. Free trade only works if countries have fair-trade deals with each other. Nobody has a fair deal with us. They are all rigged against us. Trump is trying to change that.
We shouldn’t deem it’s more important to have cheap consumer goods than to be able to have reliable supply chains for national security.
Targeted tariffs on specific industries and materials are super important if you ask me. To put it bluntly, China will be doing to us what we are doing to Iran in the near future if we don’t get a clue and start taking control of our supply chains. That’s what Venezuela was about, and that’s what Iran is about. That’s what tariffs are about. Making sure we can produce things we need and that are necessary for our national security.
If we can’t produce missiles or drones because China does it cheaper, we are in big trouble. We still need drones and missiles. Period. I guess we will have to “get better” at producing them, because if we don’t, China will control our future, not us.
As of now, our military is the best. But soon, China will be equally as formidable. And I’ve had people tell me we actually lose war-game simulations against them because of drones. Just because they produce them cheaper doesn’t mean we can’t make our own. Let’s do a little currency manipulation of our own. And subsidize important industries. Just like other countries do to us.
Porter Comment: Just curious…
When have you seen any government program lead to prosperity or any tax lead to wealth?
Also, sincere question: what is your level of education? And what is your main source of mainstream news?
Sorry we disagree about freedom. – Porter
“Of Course Tariffs Are Taxes”
Ed W. writes:
Hi Porter,
Of course tariffs are taxes. The question is whether tariffs, which are taxes on international trade, should be preferred or shunned compared to other forms of taxes, such as income taxes or taxes on capital, such as real estate taxes. (This is setting aside the argument that reducing government expenditure rather than raising taxes is to be preferred, a point on which we wholeheartedly agree.)
It is a rule that taxation reduces the base on which it is applied. Income taxes reduce income. Taxes on capital reduce returns on capital. Taxes on trade reduce trade. But is that reduction in trade good or bad? It depends primarily on how it affects a country’s ability to produce the goods traded (its capital and technology base) and how important those goods are as they relate to the ability of the country to defend itself and to provide for basic needs.
For instance, suppose we were to enter into a war with China, and they sank all of our boats. It’s not like we could call a “timeout” to the war and say to China (where most of the world’s steel is made), “We need to import your steel so we can replace the boats you sank.” That’s not going to happen. So it makes sense to support a domestic steel industry through tariffs, even though the law of comparative advantage says that China can produce cheaper steel (mostly because they have newer plants and looser environmental laws).
Of course China knows the strategic advantage that their predatory capitalism provides them, their politicians are shrewder than ours as they are engineers whereas ours are lawyers.
Or consider a country that isn’t able to grow enough food to feed their population. They may trade goods they can produce for food, but that is a precarious situation should the ability to import food be impaired. Better to be self-sufficient in food than be dependent on trade to provide it.
Your argument for free trade cites Ricardo’s law of comparative advantage, which works because it increases the amount of goods of both the possessor of absolute advantage and the weaker party if both parties are willing participants. This is true if you define wealth by the amount of goods that are consumed by all parties in a short time frame. What Ricardo’s theory doesn’t address is the effects on structural capital that the abandonment of a manufacturing technology entails. We should ask the question: What is wealth?
You infer that wealth is equal to the extent of goods one can consume. I’ll argue that wealth is better related to the extent of capital and technology that one possesses, because all consumption goods disappear soon after they are obtained, whereas the ability to produce those goods remains “forever.” What is really important is who has the deeper and richer technology base as that provides the greatest number of options one can pursue. A wealthy country can produce whatever it needs and isn’t dependent upon others. (Give a man a fish and he’ll eat for a day. Teach a man to fish and he’ll eat for a lifetime.)
I wish you would have really listened to Steve B:
“Maintaining strong engineering capability requires both product and process expertise, and manufacturing is required to maintain product and process expertise. Without manufacturing, one’s product and process technical expertise begins to fade.
America has been massively whored by Wall Street and our politicians, and most of our corporate executives have contributed to the country’s demise due to their lack of economic knowledge on how the world truly works.”
He hits the nail on the head. Once a technology is lost it is hard to regain. And if it is essential for one’s defense or ability to provide the necessities of life one is screwed.
The application of free trade by the U.S. in a world which practices mercantilism has led to a persistent trade imbalance. Dollars have poured out of the to finance the world’s economy. But as you know from your study of economics the books must balance. A trade imbalance is only permissible if there is a corresponding imbalance in the capital account of the opposite sign. For most of my lifetime America has been paying for imported goods by selling America’s capital assets. A foolish trade in the long-term perspective. All of those U.S. dollars that we have sent overseas will eventually come back as purchases of U.S. assets, whether stocks or farmland or buildings. Now you may say that it doesn’t matter who owns the assets (as long as you hold your significant share). The residents of the “banana republics” would beg to differ with you.
To use Nassim Taleb’s vocabulary, the pursuit of the “free trade” which you defend has led to a very fragile U.S. strategic position. We are precariously dependent on our enemies to provide strategic necessities, whether rare earths or manufactured goods. Not a safe place to be in! And the practice of mercantilism to rebuild our capital and technology base in the area of strategic necessities is wise, even if “expensive” in the short term.
You apparently haven’t travelled much in the American Midwest and South to see the devastation to whole communities that the decamping of factories from the USA to Asia has produced. This is what produced the dissatisfaction in the former middle class that elected Trump. Free trade has worked well for you as a finance guy. But it hasn’t worked for those whose incomes have stagnated while the incomes and assets of the 1% have soared. Yes, they will pay more at Walmart for their imported goods with tariffs. But they would have been better off if their factories had not closed due to “free trade.” And they will be better off in new factories built to reshore goods to avoid tariffs as their incomes will rise.
Porter Comment: Ed —
With tremendous appreciation for your note and admiration for your ability to craft an argument, what you’re proposing here is nothing short of insanity.
We already spend more on defense than every other major nation – combined.
The idea that we’re not safe and that we should do more to provide for our defense is going to bankrupt us.
We already have so much technological dominance that it is virtually inconceivable that any nation will be able to match our prowess in another 100 years.
And how did we develop that prowess? Through free trade. The idea that we need tariffs to assure ourselves of technological independence is absolute lunacy. We are the largest market in the world — by a wide margin. We need trade to make sure that our industries remain ultra competitive.
Many of your other arguments are simply… stupid.
We’re going to run out of steel without tariffs? You can’t possibly be that dumb. We invented an entire new way of producing steel here – Steel Dynamics. We did so because, mostly thanks to unions, we couldn’t afford to make steel here competitively with the world. So what? Trade and competition forced us to find a way, and we did. Entrepreneurs did. Not the government. Tariffs simply protect the companies that aren’t innovative!
You say: Better to be self-sufficient in food than be dependent on trade to provide it.
Ridiculous. Do you think Taiwan would be better off planting bananas and fruit than building semiconductor fabs?
There’s no such thing as “predatory capitalism.” Capitalism requires willing buyers and sellers. There is only a predatory state, which relies wholly on coercion. Unless you pay your taxes because you just want to?
“You apparently haven’t travelled much in the American Midwest and South to see the devastation to whole communities that the decamping of factories from the USA to Asia has produced.”
Wrong. My adopted family is from rural Appalachia. The government has been handing out the dole there for most of the last 100 years. Hasn’t helped. Neither will your proposals.
What those people need is not make-work jobs that aren’t economic. What those people need is to starve for a few months. Necessity is the mother of invention.
Trust me, they’d figure something out. Those fuckers are the most ingenious lazy people you ever saw. They will do anything to avoid a day’s work.
Porter
“False Comparative Advantage”
Kendrick M. writes:
Many of the firms that abandoned the U.S. to go overseas in the last 50 years did so to avoid OSHA, unions, environmental protection, etc. That is, they went where they could pollute and exploit the workers. Such is not comparative advantage. It is evil. Free enterprise is not the freedom to abuse.
Porter Comment: Kendrick —
I find it deeply ironic that you would categorize “free” enterprise as a system of coercion and exploitation while simultaneously defending the government’s regulators, who routinely confiscate property owners’ economic interests (via regulation) without compensation.
I’m sure you realize that the government explicitly uses coercion.
That’s for “our” own good, right?
Yes, of course.
Taking my property is always what’s best… for you.
Porter
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