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Eye On The Market
Salem’s Lot: Gulf War update; the Purge of senior US military officers; a US fossil fuel reliance fever dream
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Good morning. This is Michael Sembolist with an early April 2026 on the market podcast. This one's called Salem's and it is a Gulf War update. Some comments on the Purge, which I'll explain, and also a US Fossil Fuel fever dream over the last few days as me and everybody else is reading the news on the Gulf War, including damage to Gulf State infrastructure, extensive damage to some US army bases, and what now looks like effective Iranian control over the Strait of Hormuz, I thought of Stephen King's novel Salem's Lot. The main character in that book journeys to a town called Jerusalem's Lot, believe it or not, with the best of intentions to fight evil, but things don't quite go according to plan. The towns eventually burn to the ground, most of the residents are turned into vampires, and everybody ends off worse than at the beginning. You know, it'll obviously take months if not years to evaluate the net result of this particular conflict. But that's just the novel that I thought of right now. Let's get into it. The President tweeted recently, go get your own oil, which was directed at both Europe and Asia in terms of advocating for them to do more to reopen the Strait rather than get into what the European and Asian reaction function might be. I thought it was more interesting to focus on the notion that get your own oil means that the United States is self sufficient. And yes, as you can see from this chart here that we have in the piece, in contrast to India and Europe and Japan and China, the US Is a net exporter of fossil fuels. When you combine them all as a share of primary energy consumption, the US Is a net exporter. The problem is in global markets that doesn't shield you from oil and gas shocks nearly as much as you might think. This is building on the work that we did in the last eye in the market. But yes, natural gas prices have not risen in the United States and that's a pretty big deal. The US is a very large producer and marginal exporter. But look at the rest of the commodity prices here. What we're showing is the commodity price pass through rate to the US. So for example, jet fuel prices in the US have gone up around 70% of the increases that have taken place internationally. Even though the United States is a jet fuel exporter, the pass through rates for wholesale gasoline, crude oil, propylene, naphtha, some other petrochemicals and shipping fuels is over 100%. In other words, for those oil and oil and gas related refined products, prices have increased in the United States by a larger percent than they've increased internationally. And so this really does, I think, put into high relief the limits of the benefits of US Energy independence. And, and that there's only so much of a firewall that accrues to the United States from being an exporter in terms of what's going on in the Middle East. Obviously, most reports suggest that Iranian capabilities have been largely degraded. But if you look at the, at the, at the pace of drone and missile attacks on Gulf countries since the middle of March, they're, they're more or less steady. And so whatever those residual capabilities are, they still seem to be roughly unchanged over the last month or so. And in terms of U.S. ammunition deployment, the Operation Epic Fury which is going on right now has just surpassed Operation Iraqi Freedom, which was a little over 20 years ago in terms of Tomahawks that have been used. So in this very short period of time, the United States has used a little more than 800 Tomahawk missiles, which is roughly four times the amount that's expected to be delivered this year. And then in terms of some of the things that you read about potential US Military offensive operations, whether it's seizing Iran's enriched uranium supplies, seizing Kharg island, seizing Kesham island, paid attention to the weather. We have a chart in here that looks at peak temperatures in the Gulf by month. And once you get into May, June, July, you're talking about 120, 130 degree peak temperatures. Weird things happen at those temperature levels. The Persian Gulf is the world's most thermally extreme marine environment. And once you get to the temperatures you're looking at in June, exposed metal temperatures which absorb heat reach 160 degrees. The interior of army vehicles can reach similar temperatures. Radar and communication systems have documented failure rates around these levels. And you get to a point where the human body can't even cool itself in the shade. So it's quite possible that weather itself will preclude some of these offensive options from being implemented or considered once you get through to the end of April or so. And that may be one of the reasons why the administration is reportedly looking for a way to exit on if the, if the United States does exit, one of the most interesting things from an economic perspective to watch is whether Iran will be able to implement their proposed toll on the Strait of Hormuz. This is the kind of thing that would have been unimaginable before the war began, but is now something that's actively being discussed, at least by the Iranians as they're speaking to themselves. One proposal I saw from Iran was that they would charge vessels $2 million each, which would, if you think about 140 vessels per day, 365 days a year, that would amount to $100 billion in revenues. Now obviously that seems preposterous, but think about this. Even if Iran only charged $2 million to the two or three thousand commercial vessels which are currently stranded in the Gulf, that would raise on its own on that one time basis four to six billion dollars, which would match or exceed the annual total revenues from the largest canals in the world, Panama Canal, the suez Canal, the St. Lawrence Seaway, the Bosphorus and the Dardanelles. We have a little table in the piece that goes through it. So it will be interesting to see whether Iran, at least with respect to the Strait, ends up with a more advantageous economic relationship with the world than when it started. And one of the things to watch, and the next couple of slides are from a presentation I'll be making it at upcoming J.P. morgan Defense Conference is there have been pretty substantial changes in U.S. naval capacity since the 1980s. And we have some charts in here from, from, from Johns Hopkins and someone from the Naval War College that shows a sharp decline in warships in the Gulf. And the two charts that are really interesting are one, adding up all the frigates, cruisers, destroyers and destroyers and something called a littoral combat ship. L I T T O R not L I T E r literal and mine hunting vessels, both of which have declined pretty sharply. Mine hunting vessels have gone from 21 to 4. And then what's really interesting is the whole category of frigates has been replaced with something called literal combat ships, which, which has turned out to be something of a disaster. Mechanically unreliable, under equipped for high threat environments, unsuited for key missions. Some of the most critical articles I have ever read in the history of analysis of military procurements are articles from all points in the political spectrum criticizing the work that was done and the outcome on these literal combat ships. And by the way, those are the ones that also have mine clearing capabilities that allegedly are going to replace the mine hunting vessels that the United States has. It. I'm sorry, if you can hear the sirens. I live in Brooklyn. It's an unavoidable part of living in state. So anyway, one more thing on this war, and obviously the war between Russia and Ukraine is. I think we're all beginning to really appreciate and experience this question of asymmetric warfare. And we have a chart in here that shows the range of both missiles and drones, certain categories of missiles and drones, compared to their payload in kilograms and with some data on their unit cost. And what's interesting is that some of these drones now have the same range as Tomahawk missiles and cruise missiles and things like that. Now their payloads are much lower, but their costs are even lower than that on a ratio basis to the point where the unit cost per payload for missiles is a lot higher than for drones. So all of a sudden you can contemplate a drone swarm which can accomplish what missiles can accomplish at a lower effective cost. And it also only takes a small drone storm swarm to do a lot of damage to port infrastructure. So I thought it was an interesting way of illustrating the changing nature of warfare. It's hard when you're analyzing what's going on. There's a drum beat in the background which is kind of hard to ignore, which are changes in the Pentagon. And it's not unprecedented. I just want to do a little bit of a history time capsule here because I think it's interesting. It's not unprecedented for presidents to fire four and five star military officers. It's very rare, but it does happen. And there are 11 examples that I've found and other people may find others, but there's 11 examples that I found from the Civil War to 2016. And the reasons that four and five star military officers get fired tend to fall into two categories, competence or conduct. So in terms of competence, you're talking about failed military campaigns. Lincoln, who fires General McClellan after the Battle of Antietam. FDR fires two admirals after the Pearl harbor disaster, Admiral Kimmel and Admiral Short. FDR also fires General Fredendall after the Battle of Kasserine Pass, Indonesia. It was the first major engagement between US and Axis forces in 1942, and it was a disaster for the US. And then more recently, Obama fires General McKiernan for what the administration perceived as a failed military strategy in Afghanistan. So five instances of foreign five star officers fired for competence. Then you can find around. I found around six examples of foreign five star officers fired for conduct. What does that mean? Insubordination, public statements, disagreeing with the Commander in Chief, something called Article 88 Violations under the Uniform Code of Military justice. Intentional or accidental public disclosure, confidential information. So you have FDR firing Admiral Richardson in 1941 when Richardson correctly argued that the US was not ready for war in the Pacific and who insisted that the fleet return to the mainland. Patton gets fired due to insubordination. General MacArthur gets fired by Truman for insubordination and essentially disagreeing with Truman's efforts to try to keep the Korean War limited and avoided shooting war with China. Truman then fired General Denfeld for disagreements over defense cuts. And then more recently, George W. Bush fires General Dugan for disclosing confidential information about Iraq airstrike plans. And then Obama fires General McChrystal for criticizing Vice President Biden and other officials. That shows up in Rolling Stone. So, you know, over 150 years or so, I found 11 in the last 14 months, nine four and five star generals have been fired. And so I think there's some legitimate questions in terms of where does this end and what does it portend for the future and is something I think that is worth watching. Okay, last last comment for this podcast. And it maybe seemed like a strange time to wonder about this, but I had a fossil fuel filter fever dream about the United States. Now you might say, well, why would you even think at this moment in time about the US Reducing its reliance on fossil fuels? The United States just paid a billion dollars to a French company to transition its investments in the US from offshore wind to oil and gas. And the EV subsidy ended and EV sales fell from around 9% of sales to 6% of sales earlier this year. But given the commodity price shock that we saw in the first earlier in this in this podcast, there are voices that are calling even on the US despite its energy independence, to accelerate the transition away from fossil fuels. Now to be clear, this is a long road. The United States uses fossil fuels for 85% of its final energy consumption, similar to numbers in places like China, Japan and India and even in Europe, which is the world's trend energy transition leader, Europe is still 75% reliant on fossil fuels. So but anyway, let's, let's take a look at what my dream had in it. So the first thing was a reduction of coal and gas shares of power generation, some pretty large declines. EV is displacing around 30% of the existing combustion engine fleet. EVs replacing around 20% of the internal combustion engine, trucks and buses. And then remember, the biggest category of energy consumption in most countries is industrial heating and residential heating and commercial heating. And so we assume some very big reductions there of 30, 40% in fossil fuel based heating in exchange for heat pumps and heat pumps are very efficient. They can convert one unit of electricity into three to four units of heat. Those are great. And solar ratios EVs can convert energy into motion at four to five times the efficiency of an internal combustion engine card. Right. So the efficiencies work in your favor here. And so what if all of these things happen, all of them, what would that mean for the United States? Well, if all the steps happened, it would result in a 20% decline in fossil fuel consumption, not 50:20. And so I think it's important to kind of understand the math here. It would result in a 20% decline in fossil fuel consumption and would require wind and solar capacity to triple from current levels. And based on the current build out of wind and solar, that would take anywhere from 10 to 15 years. Now for, for a country like the US without a carbon tax, at a national level, gasoline tax and and declining renewable subsidies, this seems like a really heavy lift. But you know, and I, I know we're in this kind of anti renewables moment right now from a political perspective. But you know, the, the interesting thing about the Iran war is it highlighted the gap between being a net energy exporter and being immune from global oil and gas shocks. And since that relationship is clearly severed at this point, eventually I think the pendulum will swing back to at least a partial reacceleration of the energy transition, if for no other reason that the United States is importing some fairly large shocks here which are going to be hurting growth and creating challenges for the Fed with respect to inflation. Okay, thanks for listening. I hope that the war ends as quickly as the administration says that it might and that and by the next Eye on the Market, we'll be back to looking at tech sector multiples and the Fed and healthcare and some of the other things going on. So thanks for listening and we'll see you soon.
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Michael Semblist's Eye on the Market offers a unique perspective on the economy, current events, markets and investment portfolios and is a production of JP Morgan Asset and Wealth Management. Michael Semblast is the Chairman of Market and investment strategy for J.P. morgan Asset Management and is one of our most renowned and provocative speakers. For more information, please subscribe to the Eye on the Market by contacting your JP Morgan representative. If you would like to hear more, please explore episodes on itunes or on our website. This podcast is intended for informational purposes only and a communication on behalf of JP Morgan Institutional Investments, Inc. Views may not be suitable for all investors and are not intended as personal investment advice or a solicitation or recommendation. Outlooks and past performance are never guarantees of future results. This is not investment research. Please read other important information which can be found at www.jpmorgan.com disclaimer EOTM.