SPOILS OF WAR: HOW AN OIL-SUPPLY CRISIS COULD BRING ABOUT AN INVESTMENT BOOM / THE ECONOMIST

 Spoils of war

How an oil-supply crisis could bring about an investment boom

The windfall from the Gulf war has shored up balance-sheets and enriched shareholders. Next comes expansion

Adding buoyancy to the balance-sheetPhotograph: Erin Schaff/The New York Times/Redux/eyevine

THIS YEAR was supposed to be miserable for oil companies. 

When it began, the price of Brent crude futures, the international benchmark, was forecast to fall below $60 a barrel, down from $68 in 2025 and $80 in 2024, amid a “super glut” in supply. 

Instead Donald Trump’s war in the Gulf has propelled it into triple digits. 

Many analysts now expect it to average $85 or more in 2026; some anticipate the price reaching $120 a barrel if shipping attacks in the Strait of Hormuz continue.

In recent days events to the west—advances by the Iranian-backed Houthis in Yemen, and Saudi Arabia’s closure of its East-West pipeline, an alternative route to Hormuz for its oil, after a drone attack—have kept it around $105. 

“Dated” Brent, for delivery in a few weeks, which is usually within a few dollars of the futures price, jumped to $132 on September 15th, according to Platts, a price-reporting agency. 

(It receded to $126 the next day.)

The price surprise has proved a boon to the industry. 

Shares in oil-and-gas businesses worldwide have risen by an aggregate 40% since the start of the year, compared with 12% for listed companies as a whole (see chart 1). 

The combined profits of the West’s seven biggest integrated oil companies plus Aramco, Saudi Arabia’s state-owned colossus, hit $91bn in the second quarter of 2026, twice their level a year earlier.

The bonanza follows years of shareholder-enforced restraint, after a spending spree collided with a price collapse in the mid-2010s.

Capital expenditure did rise after Russia’s invasion of Ukraine pushed oil above $120 a barrel, but cashflow grew faster (see chart 2, top panel). 

The surplus went mostly on repayment of debt and payouts to shareholders, rather than on new wells. 

Much of the capex increase, in turn, reflected inflation in drilling and service costs rather than a genuine surge in activity. 

This time, though, oil firms may have to do more with their towering piles of cash. 

The Gulf war could set off a burst of exploration and dealmaking that shapes the rest of the decade and beyond.

Oil companies have so far also spent their latest windfall largely on paying down debt and rewarding shareholders (and, at the margin, on increasing output from existing assets). 

Take debt first. 

The companies used much of the cash that arrived after the invasion of Ukraine to shore up their balance-sheets. 

In the 18 months or so before the Gulf war, as prices fell, they turned back to borrowing to keep shareholder distributions steady and fund committed capital expenditure (see chart 2, bottom panel). 

Now they are deleveraging once again. 

In the second quarter of 2026 the five largest majors—ExxonMobil, Chevron, Shell, BP and TotalEnergies—cut their combined net debt by $36bn, or nearly 20%. 

Smaller firms, which typically have heavier debt burdens, have been even more focused on lightening them.

Another priority for oil firms has been lining their owners’ pockets. 

On the eve of the Iran war many investors were bracing for leaner times. 

The majors had announced a combined 11% cut in shareholder distributions, mostly through cancelled buyback programmes, notes Alastair Syme of Citigroup, a bank. 

Special dividends doled out by smaller firms, often debt-funded, looked unsustainable. 

The oil-price bonanza has changed that. 

All the majors bar BP have either held dividends and buybacks steady or increased them. 

Small players are now offering not just special dividends but recurring ones, too.

After debt reductions and shareholder payouts, little has been left for investing in expansion. 

Aggregate cash-on-hand at the majors barely budged between the fourth quarter of 2025 and the second quarter of this year. 

Executives have been at pains to reassure investors that most of the 2026 windfall will trickle down to them, not into new projects. 

The only exceptions are Diamondback, a fracking giant, and big unlisted firms, such as Continental Resources and Hilcorp Energy, which have funded quick-turnaround projects like completing existing wells in America’s shale basins.

Earlier in the war such caution was warranted. 

Oil prices crashed in June, when America and Iran reached a tentative deal. 

But now that renewed fighting has sent them soaring, they could stay high for months, making new projects more viable. 

Those projects are becoming essential. 

Every two years the depletion of oilfields costs the world a Saudi Arabia’s worth of crude supply. 

Replacing it is getting harder: the paucity of recent discoveries means daily oil-and-gas production could fall by 31m barrels by 2040—nearly a fifth of today’s total. 

As many as 70 companies are at risk of their output falling by half, reckons Wood Mackenzie, a consultancy.

Oil firms therefore need to refresh their portfolios, and they now have the means to do so. 

Geopolitical upheaval, and the desire to diversify away from the Middle East, are reinforcing the case for investment, says Paul Hickin of Petroleum Economist, an industry journal.

The slow way to gain new assets is to explore. 

Budgets aren’t rising yet, but there are signs that the majors are on the hunt. 

Rather than bidding for formal licences and committing capital upfront, they have been amassing huge tracts of land, then scanning them with artificial-intelligence tools to seek places to drill (see chart 3). 

Farm-down deals—in which a national oil company funds a foreign major’s exploration in return for a stake—are also becoming more common, partly because governments want to boost domestic production.

A wide range of geographies are drawing attention. 

There are deepwater plays in the South Atlantic, off the coasts of Namibia or South Africa, as well as the eastern Mediterranean. 

There are uncharted basins in places such as Uruguay, Vietnam and Papua New Guinea, where exploration is just beginning. 

And there are countries from Algeria to Australia where firms are trying to replicate the American shale approach, along with mature reservoirs in Asia that can simply be drilled harder.

A quicker route to building resources is to acquire rivals. 

At the start of the year merger activity was expected to be muted, as low prices depressed appetite for deals. 

It was slow at first, but for the opposite reason: volatile oil prices made it harder for buyers and sellers to agree on valuations, says Bob Brackett of Bernstein, a broker. 

Both sides are now getting used to the idea of higher prices for longer, and dealmaking has accelerated. 

Seven deals over $1bn have been announced in the past two months.

Transactions may well multiply next year. 

The majors have now digested the big acquisitions they made in the early 2020s, notes Dan Pickering of Pickering Energy Partners, an investment firm. 

Stronger balance-sheets will make it easier to splash out. 

Private-equity firms, commodity traders and outsiders seeking resources beyond the Gulf—the Japanese among them—are seeking assets, too. 

And America will have less than two years left of a deal-friendly, drill-happy administration.

Shareholders, for their part, do not seem to be banking on a golden age of expansion just yet. 

Hassan Eltorie of S&P Global, an information provider, notes that most listed oil companies trade at the same price-to-cashflow multiples as before the war, suggesting their outperformance reflects higher oil prices, not any lasting change in their prospects. 

The trajectory of oil demand remains uncertain. 

Exploration could disappoint. 

And there are few obvious big acquisition targets to go after. 

Nevertheless, the quagmire in the Gulf gives the industry just the opportunity it needs to set a new course.