Oil Intensity

Photo Credit: Dan Tremper, USCG

The war in Iran is so much in the news, and I have so little to add, that I avoided writing to you at all.  The situation changes every day.  Whatever I say will likely turn out wrong, and quickly!

So let's talk about something related, but slightly different.  The stock market didn't get the memo that we have a war in progress, and that 20% of the world's oil supply is bottled up inside the Strait of Hormuz.  Instead, the market bounces along close to its all time highs.  Volatility remains low.  In previous oil crises, the stock market gyrated wildly.  Today, it barely seems to notice.  What's going on?

To begin, and despite headlines to the contrary, the economy continues to perform well.  Real GDP and corporate earnings grow healthily.  In spite of dire forecasts—stemming first from President Trump's tariffs last year and then from this year's spike in oil prices—inflation remains subdued.  Currently, we have strong growth with moderately low inflation—an ideal combination.

But I propose a further explanation.  Look at the current top ten companies in the S&P 500:

Microsoft

Apple

NVIDIA

Amazon

Alphabet (Google)

Meta (Facebook)

Berkshire Hathaway

Eli Lilly

Broadcom

Tesla

Together, these companies represent between a quarter and one-third of the index.

Microsoft, Google and Facebook simply don't care about the price of oil.  They make software which they ship to their clients electronically.  They need power for their datacenters, which they draw from the power grid, likely generated by coal, nuclear, hydro-electric, or solar.  Oil barely enters the equation.

NVIDIA and Broadcom make very small chips that require massive investment in R&D, but minimal oil for manufacture (maybe none) and are easy to ship with a light oil footprint.  Lilly also ships a very small, very light product, in which research and development is everything, and for which shipping contributes little to the overall price.

Of the top ten companies, only Apple, Amazon, Berkshire and Tesla have significant exposure to the price of oil, largely due to shipping. And I question whether Apple, whose App Store and other licensing operations generate massive revenues, or Berkshire, which gets one-third of its revenue from insurance services, really belongs here.  (Berkshire Hathaway does own a railroad.)

Without noticing, we have moved some distance into a "post-oil" economy.  I don't want to claim too much, such as by saying we no longer need oil or have no stake in the Strait of Hormuz.  But the S&P 500 was once dominated by car companies, big manufacturers, oil companies and banks, and that picture has totally changed.  The companies driving growth today sell in-demand IT products that generally feature falling costs, increased automation, virtually no shipping expense, and little business exposure to oil prices.  No wonder the market keeps going up.

Furthermore, we now have millions of Teslas and other EVs from all around the world on the road, bypassing the gas station, as we never had in previous oil crises.  That trend will only grow.  Tesla just introduced a long-haul semi that might remake the trucking industry.

The trend is not exactly new.  Economists call the relative demand for oil, measured against economic growth, "oil intensity".  The intensity of our oil dependence has declined gradually for years.  Global demand continues to increase in absolute terms, driven by China and developing nations.  But in the United States, we have reached a moment when the stock market ignores both a war in the Middle East and crude oil priced above $100 a barrel.

What a great outcome.  Environmentalists, political and economic thinkers have looked forward to this for decades.  I think the trend will only continue, potentially remaking politics in the Middle East and eventually bringing us some peace, at last.  At least, I hope so.