Strait of Hormuz Tensions: U.S. Energy Advantage?

Energy Market Perspective

Europe’s Gas Shock Reinforces the Value of U.S. Energy
European natural gas markets are flashing a warning sign ahead of winter. Traders are buying protection in case benchmark gas prices more than double during the 2026 and 2027 winter seasons. Some options are tied to prices as high as €100 per megawatt-hour, which is roughly $34 per MMBtu in U.S. terms. That is well above recent European gas prices in the mid-€40s per megawatt-hour range, or roughly $14 to $17 per MMBtu. That is still far higher than what Americans are used to seeing with U.S. natural gas prices.

The main concern is supply. Europe is trying to refill storage before winter, but the market is still dealing with major LNG disruptions tied to the Middle East and the Strait of Hormuz. Before the conflict, the Strait handled roughly 20% of global LNG flows, making it a key chokepoint for global energy markets. Qatar’s LNG disruption is especially important because Europe has become more dependent on seaborne LNG since cutting back on Russian pipeline gas.

From a U.S. energy market perspective, this is a reminder that American oil and gas production plays an important role in global energy security. When supply from the Middle East becomes uncertain, buyers and investors place greater value on energy that comes from stable, domestic sources. U.S. producers, LNG exporters, pipeline operators, and oilfield service companies can become more important when global supply chains are under pressure.

It also reinforces why American oil matters. Even though this issue is centered on natural gas and LNG, disruptions near the Strait of Hormuz can raise broader concerns about crude oil supply as well. Oil is priced in a global market, so instability overseas can affect pricing, sentiment, and investment opportunities here in the U.S.

The bigger takeaway is that energy risk is not limited to one commodity or one region. Natural gas, LNG shipping routes, oil supply, storage levels, and geopolitics are all connected. If global disruptions continue into winter, markets could see renewed pressure from higher utility costs, tighter energy supply, and inflation concerns. For investors and potential investors, U.S. energy remains relevant because it offers exposure to a sector that can benefit when secure supply becomes more valuable.

Ask the "Tax Guy"

Tax treatment can be one of the most important factors in evaluating an oil and gas investment, especially when investors are considering a future sale, exit, or divestiture. In working interest participation investments, the tax consequences of selling oil and gas properties may depend on several factors, including the investor’s basis, prior deductions, depletion, depreciation, and how the gain is classified for tax purposes.

One topic that often raises questions is what happens when an oil and gas working interest is sold. The sale may result in taxable gain, but that gain may not all be treated the same. Depending on the assets involved and the investor’s specific tax position, portions of the gain may be treated as ordinary income, capital gain, or subject to recapture rules. Because these rules can be complex and highly dependent on each investor’s circumstances, it is important to understand how a sale or divestiture may be taxed before making exit decisions. We asked our EVP of Tax, Rex Gifford:

Q. What are the income tax consequences for a sale or divestiture of oil and gas properties, specifically a working interest?

A: As with any sale or divestiture of assets, the sale of oil and gas working interest creates a realized taxable gain. Since the costs deployed for acquiring the oil and gas working interest and developing said working interest (through drilling, testing, completing, stimulating and equipping) are claimed as deductions, which in turn reduce the actual costs incurred (i.e., the adjusted basis).

The step by step method of computing the Gain on sale for the working interest is as follows:

1.)  Determine the amount of net sales price (amount realized, IRC Section 1001(b)

2.) Determine the adjusted basis of the working interest being sold, IRC Section 1011

    Considerations when determining the adjusted basis include:

a.) increases for capital costs incurred for acquisition and development

b.) decreases for depreciation, intangible drilling costs (“IDCs”), depletion,

amortization and other allowable deductions (IRC Section 1016)

3.) Compute realized gain (IRC Section 1001(a)

            Gain equals Step 1, Amount realized minus Step 2, Adjusted Basis

4.) Determine the current year recognized gain (IRC Section 1001(c)

In most cases, with regard to the sale of oil and gas working interest, the amount of the realized gain will be equal to the recognized gain.

For the sale of oil and gas working interest, the recognized gain has two components:

1.) The portion of the Gain taxed as ordinary income

a.) For the decrease in basis attributable to the depreciation of personal property (oil and gas equipment, casing, and other personal tangible property, Section 1245 requires that for the accumulated depreciation deductions claimed, this amount must be “recaptured” and taxable as ordinary income.

b.) For the decrease in basis attributable to intangible drilling costs being claimed for the working interest sold, IRC Section 1254 requires this portion of the gain to be “recaptured” and taxed as ordinary income.

2.) Assuming the working interest sold has been held for twelve months or more, the remainder portion of the gain, (the portion not included in item 1) above) is deemed to be a Section 1231 gain. This portion of the gain is taxed at the capital gain rate of 20%.

Acquisition and development of oil and gas working interest are a proven and potent income tax mitigation strategy of accelerating deductions which may be claimed in the current tax year to reduce taxable income. However, with all tax incentives, current tax law curtails some of these benefits by requiring the “recapture” of some of these ordinary deductions such as depreciation and intangible drilling costs to be taxed as ordinary income once the deduction amounts are being recovered by the sale of the oil and gas working interest.

To be discussed as a future question: “Could the recognition of the gain on sale of oil and gas working interest be deferred by participating in a Section 1031 exchange?” The simple answer is, assuming the exchange was properly structured and in conformity with current provisions of the Code, the answer is YES. This required structure and conformity with current provisions of the Code will be discussed in a future “Ask the Tax Guy”.

Have a tax question you’d like covered in a future issue? Email it to theupside@kingoperating.com.

DISCLOSURE: For educational purposes only. Not tax, legal or accounting advice. Please consult your tax professional before making any investment or tax-related decisions.

Happening at King

On the Latest Episode of The Jay Young Show: Executive Protection, Online Safety & Energy Security
In this week's episode of The Jay Young Show, my co-host Jordan Soto and I sat down with Drew Mitchell, Founder and Managing Partner of Valence Global, for a conversation on executive protection, personal security, online safety, and the importance of protecting what matters most.

Drew brings more than 20 years of experience in law enforcement, SWAT leadership, investigations, and international close protection. He explains why modern security is about more than having a bodyguard. It requires a full protective ecosystem built around intelligence, planning, online awareness, family safety, travel risk, and proactive decision-making.

Watch it on LinkedIn, Rumble and YouTube (@JayRYoungOfficial).