The recent US-Israeli military assault on Iran, which resulted in significant casualties and strikes on Iranian leadership and infrastructure, has triggered a sharp escalation in Middle East conflict. Iran has retaliated against Israeli and US bases and regional energy infrastructure, and has threatened to disrupt shipping in the Strait of Hormuz, a critical chokepoint for global liquefied natural gas supplies. This has caused oil and gas prices to surge, mirroring the market dynamics following Russia's 2022 invasion of Ukraine.

Impact on Fossil Fuel Company Strategy

According to an equity research analyst, this war is likely to confirm and cement a strategic shift among major oil and gas companies away from renewable energy investment and back toward fossil fuels. The analyst notes that the conflict reinforces a pre-existing policy change, as the soaring prices for oil and gas make those sectors more financially attractive. This trend echoes the post-Ukraine invasion period, which prompted several energy giants to cut growing spending on wind and solar power.

Profitability Drives the Shift

The core driver for this strategic pivot is the significant disparity in profitability between fossil fuels and renewable energy. Fossil fuel projects can offer returns of almost 20%, compared to high single-digit returns from renewables investments like wind and solar. This profitability gap was historically balanced against corporate decarbonization targets and the imperative to transition by 2050. However, the analyst states that companies "don't really care so much about that anymore," prioritizing higher-margin businesses in response to shareholder pressure. Activist investors, for instance, have pushed for strategic resets at companies like BP.

Examples of the Strategic Pivot

European energy majors are already exemplifying this shift. Shell and BP have slashed their renewables investments in recent years, with BP's leadership change seen as ending its 'renewables rockstar' era. Norway's Equinor has also reduced its green energy spending.

Contrast with Utility Companies

The analyst draws a clear distinction between oil and gas producers and utility companies. For utilities like RWE or Iberdrola, the path to renewables remains very clear and is expected to continue uninterrupted. The analyst does not believe these companies will reverse course to build more gas power plants due to the Middle East conflict and gas shortages, implying their commitment to energy transition is more entrenched.