Last weekend’s drone missile strikes against Saudi Arabia’s oil infrastructure brought the energy sector to center stage, overshadowing (for now) the Sino-American trade war.

For today’s interview, I turn to our team’s expert on energy: Robert Rapier, chief investment strategist of Utility Forecaster and a regular contributor to our flagship publication, Personal Finance [pictured]. I work as the managing editor on both publications, which gives me a first-hand look at the incisiveness of Robert’s observations.

Robert is no armchair analyst—he has two decades of in-the-trenches experience in a wide range of fossil fuel and biofuel technologies, including refining, natural gas production, gas-to-liquids, ethanol production and butanol production.

Investor anxiety has eased and oil prices have cooled, amid Saudi Arabia’s recent assurances after the attack that production will soon get back online. However, tensions persist and they’re buffeting the markets. Let’s see what our man in the oilfield has to say.

Houthi rebel groups in Yemen claimed responsibility for the weekend attacks against Saudi oil infrastructure, but the U.S. blames Iran. How concerned should investors be that the situation could get out of hand and result in outright war?

We should be very concerned. Saudi Arabia is the most important oil producer in the region.

The United States remains the world’s top oil consumer, averaging 20.5 million barrels per day (BPD) in 2018. Saudi Arabia was the second-leading producer last year at 12.3 million BPD, while Russia came in third at 11.4 million BPD.

The Saudis have largely been untouched by previous wars. Any war that entangled them and Iran would have serious economic repercussions. We could be back to $100 oil in a hurry. That, in turn, would likely tip the global economy into recession.

Put the loss of Saudi oil production in perspective. How bad are the ramifications for global oil output?

These attacks against one of Saudi Arabia’s largest oilfields and the world’s biggest crude processing facility sidelined a total of 5.7 million BPD of oil production.

This is the largest oil disruption ever. It sidelined the equivalent of the entire shale oil boom; more than the equivalent of all the world’s spare oil production capacity. We have simply never seen anything like this before in the history of the oil industry. Saudi Arabia says production will soon get back up to speed, but we’ll see.

Do you think the resultant rise in oil prices will hasten the expected global recession?

I expected the Saudis to put out a soothing message to the markets, because the last thing they need is a recession that could impact their exports. So, they came out and said they expect to be back to full production in 2-3 weeks.

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Many analysts feel that’s optimistic given the damage that has been shown on satellite photos. In any case, everyone believes that a fear premium of maybe $3-$5/bbl will return to the price of oil, as the myth of Saudi invulnerability has been punctured.

Which energy sub-sectors are the biggest winners from this crisis? For example, exploration and production giants are seeing their share prices rise.

The U.S. oil industry — specifically liquids producers — will benefit. Their bottom line will be improved by an increase in oil prices. Over the longer term, there could be a trickle-down effect into other sub-sectors, but the most immediate and obvious beneficiaries are the oil producers.

One would expect that an industry in which production is increasing at a robust pace year after year is a great place for investment. That’s only partially true.

U.S. oil production has surged over the past decade, but U.S. oil producers have fared poorly. That’s because they keep pushing production ahead of demand growth. They haven’t been in a position to profit from this production surge, because there are too many producers eroding margins. The same is true in the U.S. natural gas industry.

Pipeline companies have fared much better. All that new oil, natural gas, and NGL production has to get from the field to the consumer. The pipeline companies make this happen, and to do so they sign up producers to long-term contracts. That’s what makes them such good long-term investments.

The other sector that has fared especially well are the refiners. They have taken advantage of low domestic crude oil prices and increasingly shipped finished products into the export market. There, prices are more influenced by global supply and demand, which has proven favorable to refiners.

Why should non-energy investors care about all of this?

They should care because of the potential to tip the economy into recession. The risk of that happening is increasing, so we are seeing some increased money flows into safer havens like bonds and utilities.

The biggest risk is that higher oil prices will put additional stress on the U.S. economy. While the housing crisis gets top billing as the cause of the 2008 recession, oil prices that had reached $100 a barrel for the first time were also a big factor. Higher oil prices lead to less discretionary income which leads to less spending.

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