Doomberg: Chance of "An Extended War of Attrition"

Doomberg on the consequences of the Israel/Iran conflict, Ukraine's worries, and often-overlooked vulnerabilities in global energy systems

Yesterday on Talking Markets we were joined by Doomberg for a conversation best described by Tmac on YouTube as “outstanding but scary.” We got into not just the market reaction to the Israel/Iran conflict, but also the often-overlooked vulnerabilities in global energy systems and energy-as-national-security, and what might possibly happen in the coming days and weeks.

The Market’s Surprising Calm

Oil dropped a couple of percent yesterday on reports that Iran was perhaps looking to restart talks, which Doomberg said was surprising: “I was kind of expecting oil would open north of $80, just on the risk of escalation, which we think is pretty real.”

Today, June 17, oil climbed again to around $75 as hope of those talks faded. Doomberg’s take yesterday was that at $71-$72 a barrel, there’s “probably $15 a barrel of geopolitical risk priced in.”

In a world of peace, Doomberg said, oil trades in the mid-50s. And an extreme escalation - such as Israel nuking Iran or Iran targeting Qatar or Saudi Arabia - would see oil trading at $120-$130.

That, Doomberg said, "would represent “a trading opportunity of a generation,” but he added that all commodity shortages tend to be followed by gluts, so, “fade spikes, don’t time them.” (Not investment advice of course.)

Revisiting the “October Surprise”

In a October 2024 piece "October Surprise," the Doomberg team made “the admittedly contrarian call at the time that we didn't think Israel would preemptively strike against Iran.”

The recent events necessitated a re-evaluation, leading to a new piece from Doomberg titled "Fog Lights," which dug into what that call got wrong. Much respect to the Doomberg team for doing this.

Doomberg's original analysis was built upon “four axioms”:

1. “Israel's sophisticated air defense system might not be able to protect the country as comprehensively as it had done before.”

2. “Iran has a lot of missiles.”

3. “At least some of them are precision guided.”

4. “Israeli senior leaders and military leaders were aware of the first three and would react accordingly.”

The relevance of these axioms lies in Israel's concentrated vulnerabilities: “the majority of Israel's power comes from five power stations,” the “majority of its drinking water comes from five large desalination plants,” and “virtually all of its natural gas comes from two fields,” Doomberg said.

Doomberg thinks that Israel possibly had a “knockout blow” strategy, that may not have worked. He warned that if “Iran is still launching missiles in large numbers that are getting through in a week from now, that's potentially pretty catastrophic for Israel,” especially given its small size compared to Iran.

It’s an extremely sobering thought, but Doomberg is skeptical that the conflict will be over quickly, instead seeing “a chance that this becomes an extended war of attrition.”

Unintended Consequences

According to Doomberg, “Zelensky and Ukraine are by far the biggest losers of the weekend, at least so far.” Senator Rubio's earlier statements about the US's inability to produce enough air defense missiles for Ukraine, combined with Zelensky's concerns about the diversion of US attention and resources, as well as his concerns about how rising oil prices could help Russia, have painted a grim picture for Ukraine as Russia launches its summer offensive.

The conflict also serves as a critical juncture in broader global power dynamics. Doomberg suggested one mental model is to view it as “World War Three," specifically “the next phase... a war between the US dollar system and BRICS.” He pointed out that Western sanctions policy is actively pushing countries like Russia, China, and Iran (all BRICS members or partners) “towards getting away from the US dollar system.” Meanwhile, China's language “railing against Israel at the United Nations was unusual in its language for the Chinese,” further signaling this broader geopolitical alignment.

Global Energy Vulnerabilities and the EU's Precarious Position

Doomberg said the EU is “the most exposed non-combatant in this war.” With its 27 member states consuming “39 exajoules a year of hydrocarbons” but only producing “6 hexajoules,” the EU is heavily reliant on imports. The only viable solution, according to Doomberg, would be for the EU to “start drilling quickly, start building new plants, legalize fracking,” but he thinks Europe “is not going to do any of those things.”

The US, too, has significant vulnerabilities, especially regarding energy infrastructure. Doomberg warned about the “precedent of the Nord Stream pipeline” normalizing the destruction of “deca billion dollar energy infrastructure,” and point out concerns about potential threats from within the US, stating, “The US... is a pretty soft target. And who knows who's in the country and what their allegiances are.”

AI's Energy Appetite: A New Paradigm

Doomberg’s take on AI is that it is absolutely transformative while also being rife with bubbles and frauds, and that both things can be true.

From an energy perspective, Doomberg said: “You can't have AI on the grid.” The established grid operators are “not innovative enough” and “don't get paid to innovate.”

Instead of tech companies “back integrating” into energy production, Doomberg sees “the energy companies forward integrating into data and selling their services to the Googles of the world.” Energy companies possess the expertise to manage large energy projects, and while tech companies can “help fund, underwrite, sign long-term offtake agreements,” the physical execution will fall to the energy sector, he said. This model, similar to LNG export terminals, relies on “long-term take or pay contracts” to make projects “bankable.”

Long-Term Thinking on Commodities

“In real terms, the long-term trajectory of all commodities is down,” Doomberg said - real terms being priced in terms of ounces of gold, not dollars. He

“If you assume that gold is at the center of our financial universe and is unchanged and everything else is priced in gold terms, you get a whole different view of the world than if you assume the US dollar, a fiat currency that is being debased, is somehow at the center of the universe.

In real terms, oil is dirt cheap today. The inflation adjusted price of oil is in the twenties using 1980 dollars. An ounce of gold has never been able to buy more barrels of oil historically, maybe day to day, but in broad strokes, it's as cheap as it's ever been. So I don't know why you want to get long. It's like basically buying vol. There's a reason why people sell it.”

Important Disclaimer: It is crucial to remember that this article is for informational purposes only and should not be considered investment advice. Consult with a qualified financial advisor to assess your risk tolerance, investment goals, and overall financial plan.