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The Geopolitical Driver Behind Oil Price Swings
Oil markets in 2025 have been defined by one word: volatility. Prices have swung sharply — dropping one day and rebounding the next — and the primary engine behind this instability is geopolitical uncertainty. The central question looming over global energy markets is deceptively simple: is the Strait of Hormuz open for business, or isn't it?
The Strait of Hormuz, the narrow waterway through which a massive share of the world's oil supply passes, has become the focal point of energy market anxiety. Ceasefire negotiations between the United States and Iran remain tenuous, with both sides pointing fingers over the terms of any agreement. Until ships are moving through the strait on a regular, normalized basis, uncertainty will continue to inject volatility into crude prices.
The Geopolitical Risk Premium
To understand where oil prices stand, it helps to quantify what uncertainty itself costs. With WTI crude hovering near $100 per barrel, an estimated $20 to $25 of that price represents a pure geopolitical risk premium — a premium that did not exist at the start of the year. Oil began 2025 with essentially zero geopolitical risk priced in; the escalation around the Strait of Hormuz changed that dramatically.
The path back to lower prices does not require a complete normalization of shipping traffic. Even consistent, incremental progress — a visible reduction in uncertainty — could trigger a meaningful decline. The trajectory could move oil from the triple digits into the $90s, then the $80s, and potentially back into the $70s over time. The futures curve already reflects expectations of lower prices ahead, and the fundamental global supply picture supports that view. There is plenty of oil in the world; the problem is not supply but transportation and the geopolitical risks surrounding it.
Oil Prices and Economic Growth
At current levels, energy prices are approaching headwind territory for the broader economy. They are not quite there yet, but the risk is real. Elevated oil prices feed directly into consumer costs — particularly at the fuel pump — and can slow both domestic and global economic growth if sustained. The resolution of the Strait of Hormuz situation is therefore not just an energy market issue; it is a macroeconomic imperative. Getting oil prices back to manageable levels would remove a significant drag on growth and provide relief to consumers already feeling the squeeze.
The Investment Case for Energy
Despite the volatility — or perhaps because of it — the energy sector has been the best-performing sector in the S&P 500 this year. Yet most investors remain underallocated. The typical portfolio holds 2 to 4 percent in energy, well below the roughly 10 percent allocation that the sector's fundamentals arguably warrant.
The case for energy extends well beyond oil. Natural gas, in particular, is emerging as a critical fuel source driven by a powerful secular trend: the global race to develop artificial intelligence. AI data centers require enormous amounts of reliable power, and natural gas infrastructure is positioned to meet that demand. The intersection of energy and AI represents one of the more compelling investment themes of this era.
The United States holds a unique advantage in this landscape. It is the world's largest energy producer, operates the largest energy infrastructure network on the planet, and is setting records in global energy demand. U.S. energy exports are poised to rise further, reinforcing the country's position as the anchor of global energy security. This production dominance has also helped keep domestic oil and natural gas prices lower relative to the rest of the world — a competitive advantage with broad economic implications.
Energy Infrastructure: The Underappreciated Opportunity
Within the energy sector, infrastructure stands out as perhaps the most attractive risk-adjusted opportunity — not just within energy, but potentially across the entire market. Pipelines, processing facilities, and transportation networks offer a combination of attributes that few other asset classes can match: high dividend yields, strong free cash flow generation, consistent dividend growth, and exposure to assets with exceptionally low obsolescence risk.
The resilience of existing infrastructure is amplified by a practical reality: building new pipelines and energy infrastructure has become extraordinarily difficult due to regulatory and permitting hurdles. This scarcity factor means the value of the infrastructure that already exists only increases over time. Existing networks cannot be easily replaced or replicated, creating a durable competitive moat for the companies that own and operate them.
Looking Ahead
The near-term outlook for energy markets hinges on geopolitics. If ships begin moving consistently through the Strait of Hormuz, the risk premium embedded in oil prices should unwind, bringing relief to consumers and removing a potential brake on economic growth. In the longer term, the structural case for energy investment remains strong. Rising global demand, the AI-driven need for reliable power generation, expanding U.S. energy exports, and the irreplaceable value of existing infrastructure all point toward a sector that deserves a significantly larger share of investor portfolios than most currently allocate. The volatility of today may well be the entry point for the returns of tomorrow.