Power, conflict and complacency: Why energy markets may be structurally underpricing geopolitical risk

Key takeaways

• Energy markets may be underpricing the persistence of disruption: The asymmetric nature of the Middle East conflict suggests prolonged instability, challenging consensus expectations for normalization.
• Supply shocks are broadening beyond oil: Liquified Natural Gas (LNG), refined products and critical industrial inputs are emerging as multi-year constraints.
• Energy costs will drive cross-sector dispersion: From industrials to semiconductors, agriculture and mining, energy-linked inputs could create uneven economic outcomes.
• Higher-for-longer energy prices could reshape the macro backdrop: Persistent higher energy costs could re-anchor inflation, compress corporate margins and redirect capital toward access to secure and reliable energy sources.

The market may be underestimating duration risk

Energy markets that previously underpriced the risk of disruption might now be underpricing duration.

The Iran conflict has disrupted shipping through the Strait of Hormuz, forcing major producers to shut in supply, highlighting how geopolitical risk can constrain energy markets even without physical damage to production.

The shock is broader than oil

This is no longer only an oil story; it is a system-wide tightening across energy and energy-linked inputs.

Taken together, this is a multi-layer disruption, where tightening in one part of the system reinforces pressure elsewhere. We believe this increases the likelihood that cost pressures are both more persistent and more widespread than markets expect.

Energy costs will drive cross-industry dispersion

We believe the most important impacts of this shock will show up outside of energy markets, creating clear winners and losers across industries.

In our view, energy shocks are no longer contained within the sector. They are moving through complex supply chains, creating greater dispersion across industries, where outcomes increasingly depend on exposure to energy costs, inputs and reliability.

Higher-for-longer energy could reshape the macro backdrop

Persistently higher energy costs could have broader and longer-lasting macro effects than markets expect.

We believe energy is evolving from a cyclical variable into a structural driver of economic outcomes, influencing inflation, growth and investment decisions over a longer horizon. Even a temporary disruption could cause a sudden and significant drop in global LNG supply, with recovery taking months, not weeks.

Bottom line

We believe energy is evolving from a cyclical variable into a structural driver of economic outcomes, influencing inflation, growth and investment decisions over a longer horizon. The result is a growing disconnect between pricing and reality.