Oil shocks, power shocks, and the age of electrification
From global oil shocks to local power shocks in an electrified world
The war in Iran has closed off the Strait of Hormuz, a narrow water corridor through which about 20% of the world’s oil is shipped. As a result, the regional war has sent shock waves through oil markets, with Brent crude futures trading as high as 105 dollars per barrel in yesterday’s session. News of G7 countries potentially releasing strategic oil reserves, and President Trump’s statement that an end to the war is in sight, pushed Brent futures as low as 85 dollars per barrel last night, and they are currently hovering around 91 dollars per barrel.
Headlines about an oil shock have hit every financial news site, leaving investors with the impression that the fallout is catastrophic. The outcome could be catastrophic, but it is one path from here and not the most likely path at this point, as nobody has an interest in catastrophic outcome in oil markets.
Paul Donovan, Global Chief Economist of UBS Wealth Management, has argued, the jump in oil prices may end up being less of a hit to growth than feared, depending of course on the duration of elevated prices. The biggest negative channel into the economy is more about how the oil shock shapes inflation expectations and interest rates. A sustained Brent crude price above 100 dollars per barrel could add as much as 0.8 percentage points to inflation, by some estimates.
While the near-term developments of the war and oil prices will remain clouded by uncertainty and unpredictability, there are certain trends in our economy, and second-order effects, that are much more interesting to explore.
Oil intensity is steadily declining
The world has become significantly more efficient in its use of oil, through lower oil intensity, which is essentially the amount of oil needed to generate a unit of GDP. Since the two oil shocks of the 1970s, global oil intensity has followed a peculiar regularity not often seen in economics or energy markets. The declining oil intensity is independent of price swings, which makes it a very powerful dynamic to understand, especially in the face of the current oil shock.
Lower oil intensity means less impact on global GDP, and thus macro fragility from oil swings will likely decrease substantially over time as oil loses its power in final energy consumption. The simplified equation below shows the direct impact on GDP growth from an oil shock. It consists of oil intensity and the change in the oil price. Demand elasticity is lower today than in the 1970s because oil and gasoline are used more efficiently and in parts of the economy where there is no immediate substitution. In the 1970s, oil used in power generation and heating could more easily be substituted.
Δ GDP ≈ −oil intensity × Δ real oil price × short-run demand elasticity
Neither shale oil production nor the energy transition has altered the linear decline in oil intensity. Observations in advanced economies show that oil intensity first declines at rates lower than global GDP growth, which allows global oil demand to keep rising. Subsequently, the rate of intensity decline accelerates to outpace the rate of global GDP growth, at which point global oil demand would peak and start to decline. The state‑owned Chinese refiner Sinopec projects that Chinese oil consumption will peak by 2027, and the International Energy Agency expects global oil consumption to peak around 2029.
The impact on the economy from higher oil prices is obviously an important question. Coming into the war in Iran, the Dallas Fed Weekly Economic Index suggested that economic growth was steady and rising towards 2.5% annualised real GDP growth. Unless Brent crude rises above 120 dollars per barrel for a sustained period, the global economy will likely not enter a recession, but inflationary pressures may be the longer‑term outcome, and a damaging one if these prices persist.
How should investors think about oil and gas companies? They have naturally rallied due to higher oil prices, but from an overall equity perspective we find the sector not very interesting. Because of declining oil intensity and slowing growth in oil consumption due to electrification, the growth outlook looks quite unappealing. That is also why we do not understand why Exxon Mobil is valued at a 12‑month forward P/E ratio of 21.2x and only a 3.5% free cash flow yield. Revenue growth has been −0.3% annualised over the past 20 years, and the future will likely hold flat to slightly declining revenue growth.
Why are investors willing to pay high prices for such an asset? It is likely driven by investors looking for yield and hedging dynamics to inflation and commodity shocks. But returning to our “return machine” from the previous article, it is difficult to see how Exxon Mobil can deliver attractive returns for investors unless future oil prices are significantly higher than today.
Power shocks will become the new “oil shocks”
Oil shocks will not disappear any time soon, and the structure of the oil market — with demand and supply finely balanced — means that any exogenous shock will continue to cause large price swings. That will not change, but as the share of oil in final energy consumption declines over time, and oil intensity falls, these price swings will affect the macroeconomy to a progressively lesser degree.
As the economy becomes increasingly electrified, macro shocks from oil will likely diminish, but power shocks will emerge as the new threat. Because electricity is not traded globally, power shocks will be more regionally contained, which is a good thing. However, as electrification increases, our electricity intensity (electricity needed for GDP growth) will likely rise, and disruptions will begin to hurt across data centers, transportation, heating, and other critical sectors. So while oil shocks will diminish in impact, the future is likely to hold power shocks instead.
To create a robust and balanced grid, energy storage systems that can store energy for longer periods and in larger volumes will be crucial for ongoing electrification. Distributed electricity production is also essential: moving away from the old model of large, concentrated power plants reduces tail risks in the grid network.
Recent power shocks such as the blackout in Pakistan in January 2023 and the grid breakdown in Texas during the 2023-24 winter are recently example of fragility and costs of power shocks. This Nature article describes the costs of power interruptions to affected areas and their impact on GDP.
Our economy will not get rid of shocks, but increasing electrification will reduce oil shocks as a macroeconomic factor and shift more of the shocks into power markets, which tend to be more contained and shorter term. In other words, we are likely moving towards a more stable economic model.
CATL and the age of electrification
We recently bought a stake in the Chinese battery-maker CATL which is a phenomenal company led by an outstanding founder. The company has an estimated 38% market share globally in batteries. The two main business divisions are EV batteries and energy storage for utility-scale power plants. The company reported 2025 results today and beat expectations saying the outlook looks solid.
At Gesda Capital, we think electrification will be one of the most transformative technology vectors, together with intelligent machines, over the next 25 years. We looked at several companies in the electrification value chain and ended up with four that we believe have strong competitive advantages and occupy important choke points. In the end, we decided to bet on CATL. While EV batteries currently drive the largest share of the business, we believe the energy storage business will be huge and form critical infrastructure.
Our current chaotic world and boom in AI have blurred the attention of investors for the seismic change that is happening in electrification and energy markets. Pakistan is seeing a massive solar plus energy storage boom, driven by the perfect storm of the war in Ukraine pushing natural gas prices higher and Europe outbidding Pakistan for Qatari gas. The country expects 20% of its electricity to come from solar in 2026, and many African countries are looking at Pakistan as a model they want to replicate.
The declining cost curves of solar and energy storage are making this energy source increasingly competitive and could make it the foundational energy system for many countries in the decades to come.
Disclaimer: This publication is provided for informational and educational purposes only and does not constitute investment advice, an offer, or a solicitation to buy or sell any financial instrument. The views expressed are those of the author as of the date of publication and may change without notice. While the information is based on sources believed to be reliable, no representation or warranty is made as to its accuracy or completeness, and no liability is accepted for any loss arising from its use. Investors should conduct their own research or consult a qualified financial adviser before making any investment decisions, as all investments involve risk, including the possible loss of principal.
Really good read and an incredibly exciting topic.
Electrification (especially when combined with storage) feels like one of the most underappreciated long-term shifts right now, particularly in emerging markets.
You mention that you looked at several companies across the value chain and ended up choosing CATL due to its position in a key choke point. Out of curiosity.. 😁 Which other 3 companies made it furthest in your selection process, and what ultimately made you pass on them?
Would be super interesting to understand how you evaluated the different layers of the value chain and what other companies you see taking advantage of the shifts towards electrification 🙌🏻
Another, and much more important, crisis brewing at the edge of the war in Iran is the price of ammonia which goes straight into fertilizer production and value chain of global food production.