Given recent events it is fitting that we spend some time on energy, an area in which we have had an interest for many years. The current conflict in the Middle East has created the greatest shock to the world’s energy supply in history, the International Energy Agency reports. Much to the surprise of many, it has also impacted access to other important but little-noticed commodities, such as helium and sulphur, which threatens industries from agriculture to computer chips. Costs have spiked, interest rates are higher, chaos reigns in the financial markets, and the lives of many people have been thrown into disarray. The longer the disruptions last, the greater the challenges for finance and economic activity will become.

There is one area touching on energy supply that has received scant attention, but has long-term implications, especially for the U.S. The table below showing the ten countries with the largest hydrocarbon reserves illustrates the slowly-approaching watershed moment:

Rank	Country	Proved Reserves (billion boe)	2024 Production (mboe/d)	Reserve Live (years)	Production Cost (USD/boe)
1	Venezuela	348.0	0.9	~1060	10-40
2	Saudi Arabia	322.4	12.8	~69	2-10
3	Iran	218.6	5.1	~118	5-15
4	Canada	191.0	4.3	~121	20-50
5	Russia	168.1	15.8	~29	8-20
6	Unite Arab Emirates	161.6	4.6	~96	3-10
7	Iraq	153.0	4.3	~98	5-12
8	Kuwait	101.5	2.7	~103	3-8
9	USA	105.3	17.5	~16	15-45
10	Qatar	98.5	1.9	~142	0.5-5

Notes on the table:

1. “Boe” refers to “barrel of oil equivalent.” This is a standard industry measure that translates oil and gas reserves into an energy-equivalent basis, permitting comparisons of reserves between countries possessing differing amounts of each commodity. The figures in the table are dynamic, meaning they change with commodity prices and new discoveries.

2. Venezuela’s oil industry has been depressed (due to mismanagement and sanctions); should its production return to something more normal, its reserve life would be far less than 1000 years, and probably more like Saudi Arabia’s or Iran’s. Since its oil is very heavy, and difficult and expensive to produce, it will take some time to return to historical levels.

3. The production figures are for 2024. Current U.S. production is about 22 million barrels a day, and reserve life in the 10-12-year range.

The U.S. stands out in this list. It sits near the bottom in terms of reserves, yet owing to the “fracking revolution” and incentives, its production outstrips all others. However, its reserve life is the lowest, and its costs are among the highest (fracking is expensive). Such figures belie the often-heard claim that the U.S. is an “energy powerhouse” outproducing all other oil-producing countries, and able to go it alone, weathering supply shocks with abundant energy at lower prices than industrial nation competitors. This may, in fact, be true, but only in the relatively short term. Limited reserve life foreshadows a day of reckoning, but that is not the only factor. So far, the nation’s frackers have been targeting the easiest-to-access shale reserves, acreage that is depleting. As it does, already high production costs will have to rise even more just to sustain high output, and commodity prices will have to be correspondingly higher for the business to be profitable. The industry’s experience last Fall illustrates the dilemma: production waned slightly in response to prices declining to about $60 per barrel, not enough to warrant making the investments needed to drill wells and increase the flow of gas and oil.

It is certainly possible that large pools of petroleum are waiting to be discovered, but it seems highly unlikely they are lurking somewhere within the U.S. or areas under its control, so new reserves won’t save us. Furthermore, the country’s refusal to use a period of hydrocarbon abundance to invest in new energy sources for the future will only exacerbate the international disadvantages that the approaching end of America’s hydrocarbon prowess will likely usher in. As the late Charles Munger of Berkshire Hathaway once said:

I like having big reserves of oil. If I were running the benevolent despot of the United States, I would just leave most of the oil we have here, and I’d pay whatever the Arabs charge for their oil and I’d pay it cheerfully and conserve my own. I think it’s going to be very precious stuff over the next 200 years.

Such a long-term view is never very popular, not to mention politically acceptable, but it is one we all should be seriously thinking about. The figures in the table will change with the vicissitudes of supply, demand, and the various non-economic influences on energy markets. Nevertheless, as long as the policy of maximizing production holds, and regardless of the outcome of the current hostilities, the direction of travel seems clear.

* * *

While not exactly a “black swan” event—given that the potential for economic stress stemming from a broad Middle East war has been discussed for years—the fallout from the increasingly widespread conflict with Iran has negatively impacted a largely unprepared world, but the U.S. only modestly so far. Transportation fuel cost increases are the one single item that has been felt broadly, with gasoline up about $1 per gallon, and the aftereffect of an even greater rise in diesel will soon be seen on supermarket shelves and in the prices of any items relying on truck deliveries. Still, consumers have shown few signs of diminished enthusiasm for shopping, and the blow to business so far is far less than in prior energy shocks, such as in the 1970s, when energy use was far less efficient than it is today.

Unsurprisingly, the financial markets have reacted with their usual drama, with volatility spiking and averages leaping or dropping, depending on the contents of the latest social media posts. Declining markets tend to elicit a lot of commentary from market analysts and pundits who like to talk about “corrections,” “v-shaped recoveries” and such. But before we permit Paul Krugman’s “Very Serious People” to dominate the discourse, let’s put the market response in perspective. Interest rates are rising as bond prices fall. The U.S 10-year treasury bond yield is up about 0.5% from February 27 (the day before the hostilities began), which is significant because it feeds into consumer rates on products such as mortgages. Still, rates remain below long-term averages. Stocks are down about 7% as we write, but that lies well within the normal fluctuation range. There is evidence of individual stock enthusiasts continuing to use market declines to heavily “buy the dips.” Not exactly a “nothing to see here” situation, but far from being a serious rout.

What happens after the fighting stops is now the subject of much speculation. The tone of these comments is telling. For example, one of the big banks encouraged investors to “keep on climbing that wall of worry,” meaning, buy in spite of negative news because fundamentals will out in the end. Normally this would be reasonable advice, but one wonders how long this bank would maintain this stance it if stocks tumbled far more than 7%. Such is the depth of bullishness in the financial world—brought on by a long period of relative stability beginning in the early 1980s—that not even a shooting war involving, directly or indirectly, a host of real and potential adversaries from around the world can shake it.

We don’t like market doomsayers any more than optimists; the latter tend to have a problem with valuation (buying high), while the former never seem to know when their negativism is “priced-in” to valuations already (for example, before the beginning of the great bull market in 1982, doomsters expected further declines). We prefer realism based on analysis, and hopefully free of the bias brought on by the long-term stability we have all experienced for over 40 years. We are aware of market risks but are ready to jump at opportunities which analysis reveals, focusing on the long term. The approaching sea change outlined in the first part of this letter, for example, could have profound consequences. It is best to prepare for such an occurrence during calmer times, because trying to “re-position” portfolios in the midst of a “black swan” event is far too late. Sooner or later we may be buying “from the Arabs,” whether we like it or not.