The Rabid Capitalist

Professor Glenn A. Okun

Russia, Iran and the Houthis, a great name for a 1960s revival band, is playing its greatest hits, “Helter Skelter” and “Gimme Shelter”. These aggressors, jointly and severally, have been attempting to use warfare to advance their economic and ideological ambitions, respectively. While they may have failed to achieve these objectives, they have caused economic damage in the form of heightened inflation. Their only hope is that the financial pain will force their adversaries to acquiesce, prioritizing economic over political goals. The energy sector remains the sole beneficiary of these conflicts.

This week the band turned up the volume. The September consumer price index came in hotter than expected, driven almost entirely by fuel. Over the weekend, the Houthis struck Riyadh’s airport twice and reportedly hit the headquarters of Saudi Aramco. And in Eastern Europe, a presidential “energy cease-fire” between Russia and Ukraine lasted roughly as long as it took to post it. Each development is a reminder that, in this conflict, the price of a gallon of diesel is a weapon, and the target is the American voter three weeks before the midterm elections.

Helter Skelter

Saturday’s missile strike on King Khalid International Airport killed at least a dozen people, including an American, and injured more than three hundred. The Houthis returned Sunday evening, setting Terminal Four ablaze, and Riyadh moved its schools online. Roughly eighty-five percent of flights were canceled on the eve of the World Petroleum Congress, which the kingdom is hosting this week. It is hard to imagine a more pointed message to the world’s oil executives.

This is not an isolated incident but a campaign. The Houthis claimed missile and drone strikes on Aramco facilities in late September, and again in early October on sites in Riyadh and the Khurais oil field, with smoke visibly rising from a refinery south of the capital. Saudi Arabia’s benchmark stock index fell as much as one percent on Sunday, with Aramco and Saudi National Bank among the decliners. Riyadh has promised to retaliate; asked whether the United States would join, President Trump replied, “We may. We’re going to look at it.”

The economics explain why the market is nervous. Before the war, about 21.6 million barrels a day moved through the Strait of Hormuz; in the second quarter, the U.S. Energy Information Administration reported that the volume collapsed to 4.9 million. Saudi Arabia’s escape hatch is the East-West pipeline to Yanbu on the Red Sea, which can carry seven million barrels a day, but limited capacity at the Yanbu terminal held actual crude and product shipments to 3.5 to 4 million barrels a day between April and July. The bypass route, in other words, runs straight through the Houthis’ neighborhood. A successful strike on Yanbu or on Red Sea tanker traffic would remove the last major workaround, and analysts estimate that could push Brent past $120.

Brent front-month futures are already back above $106 a barrel, and the contract for delivery six months out has hit a record. That second number is the more telling one: investors have abandoned the notion that this conflict will be over soon. Meanwhile, Iran is rebuilding its missile and drone arsenal, fortifying the Natanz and Pickaxe Mountain nuclear sites, threatening the United Arab Emirates, regional data centers and undersea cables, and stepping up attacks on tankers in the Gulf. At least three commercial vessels were hit over the weekend in and around the strait. The U.S. has a third carrier strike group heading for the region, and Mr. Trump has said only that he will not resume strikes before the midterms.

Back in the U.S.S.R.

The second front of the energy war is being fought over refineries. Ukraine has spent months striking Russian refining capacity, arguing correctly that oil revenue finances Moscow’s war. Russia has answered by pounding Ukraine’s power and gas grid. Mr. Trump, who has blamed the Ukrainian strikes for the global diesel shortage, intervened twice in three days. On October 9, Washington announced a deal for Russia to release more than 300,000 tonnes of diesel immediately and 1.5 million tonnes more over time, backed by a temporary Treasury license lifting sanctions on Russian diesel imports. On October 11, he declared on Truth Social that “effective immediately there is an ENERGY CEASEFIRE” between the two sides. “Both parties have agreed. Do not break it!”

Within hours, according to President Volodymyr Zelensky, Russia launched a targeted strike on Ukrainian power and gas facilities. “For now, this is Putin’s answer to Trump,” he said. Neither combatant has confirmed the deal, and Mr. Zelensky, facing the prospect of reduced American arms deliveries, has said only that Ukraine would respect an energy cease-fire if Russia did the same.

The Russian diesel is a drop in the ocean of supply. It equals roughly three-quarters of one day’s American consumption. Diesel, which hit a record $6.52 a gallon in September, has drifted down only to about $6.28. Markets appear to read the deal less as a breakthrough than as a sign of desperation.

For Moscow, by contrast, every dollar matters. A bipartisan group of seven senators has demanded that the administration reverse course, noting that a 2022 law bans Russian energy imports and that the U.S. “should not provide Putin with a financial lifeline while Russia continues to kill Ukrainian civilians.” It is worth recalling that Treasury Secretary Scott Bessent told his confirmation hearing in January 2025 that sanctions on Russia were not strong enough, and that the previous administration had been “worried about raising U.S. energy prices during an election season.” Election seasons, it turns out, are bipartisan.

Gimme Shelter

The Labor Department reported Wednesday that consumer prices rose 3.7% in September from a year earlier, up from 3.4% in August and above the 3.6% consensus. Gasoline rose 9.1% in a single month and is up 34% from a year ago. Fuel oil is up 74%. Transportation services rose 0.6% as fuel costs worked their way into freight and airfares. Stock futures turned negative on the release, and the 10-year Treasury yield rose.

However, core inflation, which excludes food and energy, was 2.6%, a tenth above forecasts and a tenth hotter month over month, but hardly a wage-price spiral. Food was flat in September and is up 2.5% for the year, although economists are watching for higher transportation costs to seep into meat and dairy. The aggressors have succeeded in raising the prices voters see on every gas station sign, not the underlying inflation rate that economists target.

This poses a dilemma for the Federal Reserve. On September 16, the Fed raised rates for the first time in three years, by a quarter point to a range of 3.75% to 4.00%, and 16 of 18 officials indicated that at least one more increase may be appropriate this year.

Higher interest rates cannot reopen the Strait of Hormuz, intercept a Houthi missile or refine a barrel of diesel. Nor will they do much to slow the data-center boom, which is adding its own inflationary pressure through semiconductors, transformers and electricity. As Cleveland Fed President Beth Hammack noted, hyperscalers show “much less price sensitivity and much greater sense of urgency around delivery.”

The Fed’s concern, after five years of above-target inflation, is expectations. Americans are fed up with rising prices, and a supply shock that persists long enough can become a demand-side problem as businesses discover they can pass costs along to consumers who are still spending. Real consumer spending was up 2.6% from a year earlier in August, buoyed by low unemployment and record stock prices. The Fed meets again on October 27, one week before the election. It is difficult to recall a rate decision with more political subtext.

Money (That’s What I Want)

If there is a winner in all of this, it is the energy sector. The average U.S. energy stock fund returned 11.6% in the third quarter, according to Morningstar, while the average domestic stock fund lost 1.8%, taxable bond funds lost 2.2% and municipal bond funds fell 5.6%. Technology funds, the consensus favorite at the start of the year, slipped 1.4%.

Is the band concluding its farewell tour or starting a longer residency? The aggressors’ strategy rests on a simple wager: that Western voters will trade geopolitical goals for cheaper fuel. The diesel waiver suggests the wager is not unreasonable. But the strategy has a cost for them as well. Iran’s economy is under a tightening blockade, Russia’s windfall is modest and temporary, and the Houthis risk pushing a reluctant Saudi Arabia into the arms of the hawks.

Trump’s folly in Iran has destabilized the Middle East, a region with fragile geopolitical foundations. Russia cannot easily extricate itself from its self-induced quagmire in Ukraine. The likelihood of sustained conflicts and high energy prices primarily benefits the energy sector, including the Rabid Capitalist’s oil and gas majors portfolio (BP, SHEL, TTE and XOM). There are no changes to our investment strategy at this time.

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