This Election Runs on Diesel

“Never make predictions,” said baseball great Casey Stengel. “Especially about the future.”

I agree. But so-called “Election Day” is next week, and Democrats may or may not retake the House and/or Senate.

Election rhetoric is loud, but the physical economy is louder. That is, politicians and pundits campaign on party loyalty and personalities. It’s a lot of theater.

Yet in the real world, people deal with price shock at the gas station and grocery store, as well as creeping inflation across much of the economy.

Whatever happens election-wise, cars still need gasoline, trucks need diesel and aircraft need jet fuel. Upstream of the pump nozzle, refineries need crude oil, plus exotic catalysts, electric power and heat, skilled labor, and periodic maintenance. Which is to say that any nation that wants to remain strong and prosperous must command vast amounts of dependable energy.

So today, let’s look at three ideas (and later, four names) investors should keep in mind through the upcoming election and afterwards:

• First, the fuel squeeze is a refining problem, not merely an oil problem;
• Second, America’s reindustrialization will favor companies tied to real assets and physical throughput; and
• Third, U.S. military power is first derivative of American energy and industrial power.

These ideas matter regardless of who wins which election next week, and whichever political party dominates. Yes, of course; markets may lurch one way or another based on politics. But molecules, machines and logistics obey harder laws.

We Have Oil, but Refined Fuel Is the Chokepoint

Most people say “oil” when they mean energy. That is like saying the Army or Navy runs on iron ore. Well, only way upstream at the mines in Minnesota. Because obviously, military power comes from finished equipment, which itself runs on refined fuels.

Nobody pours crude oil into cars, pickup trucks, farm tractors, locomotives or airplanes. They buy gasoline, diesel and jet fuel. And between the wellhead in the prairie and the fuel farm at the airport is a sprawling, expensive, temperamental industrial organism; a system of systems that heats, pressurizes, cracks, cleans and recombines hydrocarbons into useful products. Plus, a vast logistical system to move barrels from Point A to Point B.

Most automobiles run on gasoline, and that’s where most people contact the oil biz; but the fact is that diesel is the true red blood of the modern physical economy. Diesel moves freight, mines ore, harvests crops and powers construction. And chemically adjacent to diesel comes jet fuel, which keeps commercial aviation and military airpower aloft.

These middle distillates – diesel and jet – compete for much the same molecules in terms of refining and processing capacity. And as we’ve discussed many times before, when the oil and refinery system tightens, higher fuel costs migrate into nearly everything else.

This is why mere availability of crude oil alone does not guarantee cheap fuel. Indeed, in the U.S. and across much else of the so-called “developed” world, quite a bit of refining capacity has been closed, converted or under-maintained. So, existing plants can run hard, but steel, valves, and a myriad of complex equipment all have limits.

And sure, a cargo or two (ort three) of imported diesel from, say, Russia may help out at the margins of short-term price-setting, yet it cannot repair years of neglected capacity.

The practical response to fuel shortages and pricing is not a fantasy refinery that appears overnight; ha, good luck with that! No, it’s called “debottlenecking;” that is, go to existing facilities and add better heat exchangers, pumps, compressors, catalysts, controls and maintenance; plus, selective expansions at operating sites; and, where economics permit, restarts of idled units. These are unglamorous investments, but also the kind that produce actual barrels.

For investors, watch refining margins, inventories, turnaround schedules and regional logistics, because the U.S. energy problem is not just the quoted price of crude. So, looking ahead, next week’s election promises may deliver all manner of positive and negative sentiments. But only refinery throughput moves fuel.

Reindustrialization Is a Long-Term Play

For decades, America has rewarded financial engineering while allowing physical capacity to migrate, decay or become impossible to permit. U.S. business schools built entire curricula around closing U.S. production, offshoring capacity, laying off workers, importing low-cost visa scabs, and trumpeting it all as some sort of managerial success.

One way or the other, and whatever happens with next week’s election outcomes, the next two years of President Trump’s second term will test whether “reindustrialization” is policy or merely a slogan.

The useful metrics are straightforward: Can projects obtain permits and power? Can pipelines, rail links, ports and transmission expand? Can American education systems train skilled workers? Can capital earn a return without waiting a decade for a bunch of bureaucrats to give permission?

In all of this, opportunity reaches far beyond oil. New factories require steel, copper, cement, chemicals, machine tools, transformers, gas turbines, grid equipment and immense volumes of electricity. Data centers look digital, but they are massive physical assets: land, concrete, cooling water, transmission and round-the-clock power. And much of artificial intelligence (AI) may live in the so-called “cloud” (hint: it’s not a real cloud like up in the sky), but it all plugs into the transmission tower grid.

This argues for a different investment lens. Investors should seek productive assets versus narratives. Favor companies that own resources and reserves, extraction and processing systems, technical expertise, equipment and logistics capabilities; things that cannot be conjured or corrupted with a software update.

Reindustrialization will create winners, but it will also expose shortages in power, materials, labor and execution.

Washington can accelerate the trend through permitting reform, favorable tax treatment, defense procurement and selective use of industrial authorities. Yet government cannot repeal laws of chemistry, physics or engineering. Projects still require years, billions of dollars and competent operators. The market will reward firms that already possess valuable systems, and can expand them without betting the company.

In short, expect volatility around the election, but keep your eye on capital spending. Follow the money into pipes, plants, power and production.

Military Power Is Industrial Power in Uniform

Here’s the larger point. Military power is the first derivative of energy and industrial power. A nation converts energy, mines, mills, factories, laboratories, shipyards, refineries and the overall grid into combat-capable forces that can deploy and endure.

A fighter aircraft without jet fuel is just an expensive metal sculpture. A tank without diesel is, first, a pillbox; then, a target and tomb. A missile without electronics, specialty metals and chemical propellants is an expensive tube of nothing-burger. And a fleet without shipyards, spare parts and trained tradesmen becomes a fast-wasting asset.

Modern economies conceal this military foundation beneath a civilian surface. Ports, pipelines, rail yards, data centers, payment systems and communications networks serve commerce in peacetime. In crisis, they become the hidden order of battle. They move fuel, process intelligence, finance procurement and keep logistics alive.

Wars in Ukraine and across the Middle East have made these lessons brutally clear: loss of refineries, power grids, ports and transport links degrade combat power as much or more than taking out soldiers at the front lines. So-called “efficiency” rapidly transforms into catastrophic fragility. Things like “just-in-time inventories,” or concentrated cloud services, or narrow supply chains save money, yes; until disruption arrives and disaster cascades.

National defense, then, is not just the Pentagon’s budget. It includes things like spare transformers, resilient fuel supplies, redundant ports, domestic metallurgy, repair depots, secure data and industrial surge capability. Energy security is not separate from defense policy; it’s the very foundation beneath it.

This is also why the election outcome matters. If political conflict delays infrastructure, discourages investment or treats every industrial project as presumptively illegitimate (cuz it’s a “Trump Thing,” of course), the damage will appear not only in prices and jobs, but in strategic weakness. Conversely, policies that expand dependable energy and rebuild industrial capacity can strengthen both prosperity and deterrence.

What Investors Should Remember

So, here we have three ideas:

• One: Today’s fuel risk sits downstream, where crude becomes diesel, gasoline and jet fuel.
• Two: Reindustrialization favors real assets, disciplined capital spending and operators who can execute.
• Three: National defense rests on energy, industry and logistics long before it reaches a battle space.

Whatever happens next week after Election Day, don’t confuse noise with the true signal. That is, we may see demonstrations or riots, lots of lawsuits, abject and crazy political theater, and likely violent market swings. That’s the noise.

But the true signal is whether America can produce energy, refine it, move it, turn it into industrial output and protect the systems that make all of this possible.

Four Ideas for the Road Ahead

Finally, the Reckoning is not an investment letter; we don’t track a portfolio. But here are a few basic ideas that ought to hold up in the months and years ahead, no matter the politics:

• Exxon Mobil (XOM): An integrated major with scale across production, refining, chemicals and complex projects; it’s well positioned when energy security and dependable supply command a premium.
• Chevron (CVX): A high-quality global producer with durable assets, financial capacity and operating depth suited to a world that still needs abundant oil and gas.
• Schlumberger/SLB (SLB): A leading oilfield-services and technology company that benefits when producers must spend more to find, develop and optimize increasingly difficult resources.
• Valero Energy (VLO): A premier independent refiner offering direct exposure to the scarce capability that converts crude into the diesel, gasoline and jet fuel the economy actually uses.

These companies are not promises of straight-line gains; no investment is. But they allow you to own capable operators tied to the hard economy of molecules, machinery and throughput. Because right now is when the world is rediscovering the true value of hard assets. Tickets on the hard asset railway are still relatively cheap.

That’s all for now. Thank you for subscribing and reading.

This story originally appeared in the Daily Reckoning . The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.

Source: https://dailyreckoning.com/post/this-election-runs-on-diesel