Inside today’s Daily Journal…

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: