The Universal Currency:

Why Energy Shocks Don't Stay In One Lane

By Bryan J. Kaus

“Energy is the only truly universal currency, and nothing, from galactic rotations to ephemeral insect lives, can take place without its transformations.” — Vaclav Smil

For months I have written about the gap between paper barrels and physical ones. The screen moves on headlines. The system moves on molecules. That gap is where most of the mispricing in this market lives, and where the real risk and the real opportunity tend to compound.

Last week, the Federal Reserve Bank of Dallas issued a rare interim update to its Energy Survey. In central banking, “interim” is a polite way of saying volatility has outpaced the calendar. It was not a procedural pulse check. It was an audit of a system under strain.

The data inside is a sobering reality check for anyone expecting a clean snap back to normal.

What the Operators Are Actually Doing

The most telling number in the report is not about prices. It is about discipline.

Nearly 70 percent of large E&P firms reported no change to their 2026 drilling plans, despite a sustained run of WTI well above $75 and stretches above $100. The operators with the largest production base in the country are choosing to wait. They have lived through enough cycles to know what the screen does not yet price in.

The headline can resolve. The system does not snap back when it does.

Tanker flows do not reset overnight. They are rerouted, adding thousands of miles and weeks of duration to global supply chains. Insurance and logistics costs stay sticky long after the chokepoint reopens. Thirty-six percent of executives now expect shipping costs from the Persian Gulf to remain structurally higher by $2 to $4 per barrel even after the conflict ends. That is a permanent friction tax on the global cost of movement.

There is also the matter of new layers of bureaucratic heat. Some reports out of Tehran indicate a push for legislation that would charge ships transiting the Strait of Hormuz in local rials. Whether it becomes a formal toll or simply a sanction-bypassing maneuver, the intent is unmistakable. The cost of moving oil through the world’s most critical chokepoint is being structurally repriced.

The Q1 Mirage

Before going further, it is worth being honest about what the Q1 earnings prints actually show.

January and February were largely normal. The first U.S. and Israeli strikes hit Iran on February 28. For roughly two-thirds of the quarter, the system was operating as expected. The real volatility started in March, and even in March, the early action was an emotional trade. War talk pushed prices up. Ceasefire rumors and peace-talk headlines pulled them back. The market spent weeks oscillating around a question it could not answer: how much of this disruption is going to manifest physically?

That answer is now arriving.

While the screen was trading sentiment, the physical system was tightening. Tanker rerouting. Refinery slate constraints. Storage filling in the Gulf with nowhere to ship to. By early April, jet fuel had moved from $2.39 a gallon on February 27 to a peak of $4.78 on April 2, before settling near $3.51 by mid-month. The benchmark European jet fuel price hit a record $1,800 per ton on March 18.

Q1 results are a rearview-mirror look at a partially stable system. The real weight will be measured in Q2 and Q3, and we are starting to see what that looks like.

Larger Than 1973

It is worth pausing on the scale of what we are inside of.

The 1973 oil embargo removed roughly 4.5 million barrels per day from global supply, about 7 percent of the market at the time. The current closure of the Strait of Hormuz disrupts up to 20 million barrels per day, roughly one-fifth of global petroleum consumption. The International Energy Agency (IEA) has called it the largest oil disruption on record, and even after accounting for pipeline workarounds through Saudi Arabia and the UAE, the real bottleneck still sits closer to 9 million barrels per day. That is more than twice the 1973 number.

There is a tendency to assume U.S. domestic production insulates us from global tightness. It does not.

The market for oil is global and interconnected. Record U.S. exports mean that when a refiner in Asia or Europe goes short, the market draws supply out of U.S. terminals to fill the void, and domestic prices rise to clear. Production at home does not mean prices at home are protected. Prices are set at the margin, and the marginal buyer is now competing globally for every barrel.

The U.S. refining complex itself is not a closed loop either. American refineries are configured for specific crude slates, and a meaningful share of those slates depends on Canadian heavy crude moving south through pipelines. Domestic light crude alone cannot run our refineries the way they were built. In a tight market, the Lifeline from Alberta is as load-bearing to U.S. fuel supply as anything we drill in the Permian.

Geography and physics do not care about borders or economic nationalism.

The Input Stack

To navigate this market, you have to stop treating energy as a sector and start treating it as the foundation of a stack.

Energy sits at the top of nearly every input chain in the modern economy. It is the prerequisite for extraction, manufacturing, logistics, refining, and power generation. Whether you are building an AI data center or growing wheat, you are buying a molecule and converting it into a margin.

When you add heat to the top of that stack, it does not stay there. It ripples outward through every node that depends on it, and the further down the chain you go, the more compounded those costs become by the time they reach the consumer.

Leonard Read illustrated this in his 1958 essay, I, Pencil, later popularized by Milton Friedman. Read observed that not a single person on earth knows how to make a simple number two pencil from scratch. It requires cedar from Oregon, graphite from Sri Lanka, rubber from Malaysia, and the coordinated effort of millions of people who will never meet, all moved and refined and assembled by what Friedman called the magic of the price system. Every one of those nodes is a conversion of Smil’s universal currency.

When the cost of that currency moves by a fraction of a penny at the transport stage, it compounds. By the time the graphite is refined and the pencil reaches a shelf in Ohio, the incremental energy costs have been baked into replacement value. This is why inflation is never one number. It is a thousand small adjustments working their way through a chain, and it stays sticky because every entity along the way is trying to recoup the margin they lost when their inputs spiked.

The fertilizer chain shows the same physics. Up to 30 percent of global fertilizer trade moves through the Strait of Hormuz. When the cost of moving natural-gas-derived fertilizer rises, the impact is not contained at the pump. It shows up on the dinner plate. The price of corn and wheat is as much a function of that strait’s plumbing as it is of the weather.

The Coping Canary

If you want to see this transmission in real time, look at the airlines.

They are the canary in the cockpit because fuel is their largest, most immediate, and most non-negotiable cost. They do not have the luxury of waiting two quarters for the plumbing to adjust. They feel the heat the moment the tanker is delayed.

The earnings revisions of the last few days illustrate the pivot from a Year of Growth to a Year of Coping.

United Airlines cut its 2026 EPS guidance from a range of $12 to $14 down to $7 to $11, citing a $340 million increase in fuel expense in Q1 alone and announcing a 5-point capacity reduction for the rest of the year. United expects to recover only 40 to 50 percent of the second-quarter fuel hit through revenue, climbing to as much as 80 percent in the third quarter and approaching full coverage by year end.

Alaska Airlines withdrew its full-year guidance entirely, citing a $600 million Q2 fuel hit and a $3.60 per share earnings headwind. The company expects to pay $4.75 a gallon in April and $4.50 across the quarter, nearly double the early-year price. Alaska began tankering fuel from Singapore to Seattle in March because West Coast refinery margins had pushed jet fuel another 20 cents per gallon higher.

Europe is in worse shape. Roughly 75 percent of European jet fuel imports come from the Middle East. The IEA’s director told reporters in mid-April that Europe had “maybe six weeks” of jet fuel left at the prevailing pace. Lufthansa Group announced it would cancel 20,000 short-haul flights through October. Slovenia introduced fuel rationing in late March, the first EU country to do so since the start of the crisis.

The response across the industry is a predictable three-step dance. Squeeze margins. Cut capacity. Pass the cost to the consumer. The fare increases of 15 to 20 percent and the bag fee hikes are not greed. They are the physical manifestation of an energy shock moving through a stack. The airlines have already pulled the easy levers. What remains is structural, and structural cuts to growth are what coping looks like.

This is just one example.

Disciplined Execution

I do not believe in the theatrical labels of bulls and bears. I believe in disciplined execution and the fundamentals of a clear market read. Discipline does not mean avoiding every bump in the road. It means controlling the controllable so you can navigate cycles when they turn, and they always turn.

The market is currently celebrating headline resolution (or lack thereof - it can, as we’ve seen change by the day, the hour and even the minute). The physical system is still executing a painful adjustment. The 70 percent of operators sitting on their drilling plans are not being timid. They are choosing the weight of the system over the noise of the screen.

For the management teams and investors I work with, the framework is straightforward.

Audit the slates, not the sentiment. Value a company on its exposure to the input stack and its ability to maintain pricing power as replacement costs rise. Look past the magic words and the latest pivot. (I wrote about that valuation discipline more directly in The Multiple Is in the Message)

Capital discipline is the north star. High prices are not a signal to chase. They are a signal to protect the balance sheet and wait for physical certainty. The 70 percent of E&P operators who are effectively holding their drilling plans understand this. They are choosing the weighing machine over the voting machine.

Watch the canary. The fuel shortages already emerging in Europe are an early warning of what happens when the cost of movement becomes a physical constraint, not just a line item. Whatever is happening in aviation now will work its way into freight, into industrials, into anything that runs on a margin and depends on a barrel.

The Point Taken

The market is currently celebrating headline resolution while the system finishes a physical adjustment that has barely begun to manifest. Q2 and Q3 are where the real weight lands. Inflation is not one number. It is a thousand small adjustments working their way toward the consumer, and the airlines are showing you in real time how that math eventually arrives.

Markets move faster than systems. Systems are what move the world.