“Our civilization is wholly dependent on the massive and continuous flows of energy… Energy is the essential ingredient of all the materials that define the modern world.”
– Vaclav Smil, How the World Really Works
After three consecutive strong years for the broader market, we suspected 2026 would be a wilder one. Boy, was that a massive understatement. At first, investors seemed focused on the transformative potential of AI, until we got a sharp reminder that energy – something so basic we usually take it for granted – is truly at the root of everything.
The year got off to a dramatic start, when U.S. forces extracted Venezuelan President Nicolas Maduro in a pre-dawn raid. Almost immediately, the U.S. announced a partnership with the interim government on its vast but dilapidated oil resources, effectively leaving the U.S. in control of an industry where China is the primary customer.
With geopolitics taking a backseat for a brief moment, February brought rolling, sector-specific crashes on fears that AI could replace large swaths of the economy with makeshift, AI-created lines of code instead of armies of highly paid programmers.
Software stocks were hit first and hardest. The sector has long been a market darling, given recurring subscription revenues, high margins and strong client retention rates. But a major AI model release from Anthropic sparked fears of a day when enterprises could replace vital but expensive software vendors with homegrown, computer-generated applications. The multiples of these once-loved companies hit all-time lows, as investors questioned the value of cash flows far into the future, the so-called terminal value. More on this below.
Subsequent AI releases triggered brutal but short-lived sell-offs in financial services, real estate brokers and insurance companies as investors viewed everything through the “AI obsolescence” lens. It got so silly that an unheard-of maker of karaoke machines sporting a $5 million market cap triggered a massive sell-off across the logistics sector after claiming its AI platform could triple volumes without new hires. Trucking stocks lost $17 billion in market cap with C.H. Robinson, the blue chip of third-party logistics, dropping 24% on the news. What a time to be alive!
If the first couple of months felt volatile, it turns out this was just a prelude to a historic energy supply shock when Iran effectively blocked the Strait of Hormuz, a chokepoint carrying 20% of global oil supply each day. With the stoppage of transit, onshore storage tanks filled up quickly, forcing production cuts across the Gulf.
Because vessels passing through the Strait typically require four weeks or more to reach their destination, the last pre-war shipments to clear the chokepoint will dock shortly. Importers have not yet felt the brunt of the supply crunch to come, but there is a cumulative 400-million-barrel (and counting) air pocket in the global flow of energy coming. For perspective, this is many multiples greater than the 2022 hit to supply after Russia invaded Ukraine.
Fortunately, there are some offsets. Some flows have been rerouted to pipelines that bypass the Strait. There is also a globally coordinated release of strategic reserves, and sanctions have been lifted on some Russian and Iranian oil sitting on water. Still, even accounting for these alternative sources of supply, the shortfall is enormous and growing every day, forcing a rapid drawdown of global inventories.
Asia is most reliant on Middle Eastern energy and will be first to feel the impact. Across Asia, we’ve already seen localized news of cooking fuel rationing, government proposals to reduce electricity usage, a spike in jet fuel prices and diesel shortages. More demand destruction in Asia is likely to come – indeed, it is mathematically required to meet the supply drop-off – through prohibitive pricing and physical shortages.
In Europe, another energy crisis is likely, given policy errors of the past (which are now being publicly admitted), critically low natural gas inventories and a pivot to Qatari LNG imports which are now trapped. Gas prices in Europe are up sharply, and the continent faces the awkward position of reconsidering Russian gas out of pure necessity. U.S. LNG exporters should do quite well selling to Europe.
While the world copes with oil disruptions and shortages, the U.S. is awash in oil with the lowest crude prices anywhere thanks to our unrivaled shale industry. We also have a bounty of natural gas and, with Iranian bombardment of Qatari infrastructure that will take five years to rebuild, the U.S. has emerged as the leading global LNG exporter. This “American energy dominance” was a cornerstone of the National Security Strategy released in November, recognizing that cheap and abundant energy is essential to maintain the U.S. advantage in AI.
The logic goes something like this: Whoever has the most cutting-edge AI has the strategic high ground. AI is power hungry; all of those proposed data centers will require an enormous amount of energy. Therefore, whoever has access to the most ample, low-cost energy will lead in the race to train the most advanced models. The battle is not over code, but kilowatts. As such, influencing the energy supply of adversaries like China is also strategically important.
Beyond oil and gas, the closure of the Strait affects many other critical commodities, threatening supply chains for everything from food to electronics. The blockade has disrupted the feedstock supply for plastics, for example, risking shortages ranging from beverage packaging to car parts. Industrial gas distributors are warning of cuts in helium supplies used to make high-end semiconductors following Iranian strikes on Qatari facilities.
In addition, with nearly half of global sulfur exports stranded and a third of urea shipments transiting the Strait, the disruption hits critical inputs for fertilizer, medicine and high-tech manufacturing. As the Northern Hemisphere enters spring planting, farmers face a dual crunch of restricted availability of sulfur and nitrogen-based fertilizers.
The point is it’s nearly impossible to make a bottle of water, grow corn, build a car, or manufacture a semiconductor without this important chokepoint open. Even if you can, it’s going to be a lot more expensive. Said differently, this supply shock is likely to lead to higher inflation, slower growth and, in some emerging economies, physical shortages.
We don’t envy Kevin Warsh, the nominee to be the next Fed Chair. Seemingly chosen for his willingness to keep interest rates low, that now seems unlikely, as some estimates for U.S. inflation in 2026 have already moved north of 4% due to this energy crisis. If inflation expectations continue to creep higher, it’s very possible that the Fed’s next move might be to raise rates, not cut them.
Eventually, one must assume that the Strait of Hormuz will reopen. By the time you read this, that may already be the case. We don’t claim to know when traffic will resume, or under what terms, but it will simply because it must. However, an end to the conflict and a full restoration of transit will not provide immediate relief; the market will still require a multi-month period to untangle logistical bottlenecks and recover from significant inventory drawdowns. Indeed, a few months of peak pandemic disruption required years for supply chains to fully recover. On the bright side, recent actions could lead to a more secure and stable Middle East for decades to come if a durable peace agreement is achieved.
In the meantime, we remain comfortable with our existing positions and believe the companies we own will navigate through this challenging period. Strong balance sheets, shareholder-friendly capital return policies via dividends and buybacks, and reasonable valuations should provide some downside cushion. Our energy and defense stocks have benefited from recent events. We also have plenty of cash to deploy into great companies at fair prices, whenever the opportunity arises. In fact, during the period of peak AI-obsolesce fears, we were able to add a new position to your portfolio, a company we have always appreciated but that had never met our valuation criteria until now.
Salesforce, Inc. is a leading customer relationship management (CRM) software company that helps businesses keep track of every interaction they have with their customers, from initial sales to ongoing support. Beyond its core CRM, Salesforce’s ecosystem includes Slack, one of the most well-known and widely used tools for helping employees at large companies communicate internally.
Opportunities to buy founder-led market leaders at a discount are rare. But recent worries that AI might allow companies to build their own “DIY” software provided an entry into what we view to be a great business trading at its lowest valuation since coming public in 2004. We view this threat as overblown, because it is both difficult and highly risky for a large company to trust its most valuable data and mission-critical operations with homemade code.
Instead, Salesforce is leveraging AI through its new Agentforce tool, which deploys autonomous agents to handle complex customer and sales workflows, and is already seeing impressive growth. CEO and co-founder Marc Benioff argues that AI opens up more addressable markets for Salesforce as it moves beyond record keeping alone to actual customer service and sales tasks with agents. By stepping in during this period of high volatility, we have established a position in a best-in-class market leader at a discounted price.
We appreciate your trust in these volatile times. Beyond the immediate headlines, events this year remind us that energy remains at the foundation of modern civilization and global competitive advantage. We’re positioned accordingly, and we’ll keep navigating the chaos with discipline and focus.
Penn Davis McFarland, Inc.
April 2026
