Strait of Hormuz Impact: Why U.S. Energy Matters

Energy Market Perspective

Why Global Supply Disruptions Strengthen the Case for U.S. Oil and Gas Investment
The Aramco warning is a reminder that the world still depends heavily on reliable oil and natural gas supply, and when a major chokepoint like the Strait of Hormuz is disrupted, the impact does not disappear the moment shipping resumes. Aramco CEO Amin Nasser warned that even if the strait reopened immediately, it could take months for the oil market to rebalance, and if disruptions continue into mid-June, normalization could be pushed into 2027. Reuters also reported that only a few vessels have been moving through the strait daily compared with roughly 70 under normal conditions, creating a major backlog in global energy flows.

For investors, the key takeaway is this: energy security has value. Global demand for oil and natural gas has not gone away; it is being “rationed” by supply constraints, higher prices, shipping delays and infrastructure damage. The IEA now expects global oil supply to fall short of demand by 1.78 million barrels per day in 2026, with the market remaining severely undersupplied through the third quarter even if the conflict ends soon.

That creates a stronger investment case for U.S. oil and gas. Domestic production is not just about commodity exposure. It is about owning assets in one of the most stable, transparent and infrastructure-rich energy markets in the world. While international supply routes can be interrupted by war, chokepoints or political decisions, U.S. basins like the Permian, Mid-Continent, Eagle Ford and Bakken offer investors access to production closer to home, under a more predictable legal and operating environment.

This is also why private U.S. energy deals can become more attractive during periods of global disruption. When supply tightens and prices remain higher for longer, well-positioned operators may benefit from stronger cash flow, improved project economics and greater demand for reliable barrels. The current crisis reinforces a simple point: the world cannot afford to underinvest in oil and gas before replacement energy systems are ready at scale.

Featured Article in Kiplinger
For many high-income households, tax planning should not start and stop on April 15. In my latest Kiplinger article, I break down why direct energy investing continues to attract accredited investors who are looking for more than market exposure.

Ask the "Tax Guy"

This week’s tax question is a great one for oil and gas investors because it touches on what happens when a working interest is sold at a gain. In certain situations, investors may wonder whether they can defer that taxable gain by using a Section 1031 exchange, which is commonly used in real estate transactions. But oil and gas interests can be more complex, and the answer depends on how the interest is structured, what exactly is being sold, and whether the replacement property meets the IRS requirements. We asked our EVP of Tax, Rex Gifford:

Q. Could the recognition of the gain on sale of oil and gas working interest be deferred by participating in a Section 1031 exchange?

A: A 1031 exchange (like-kind exchange under IRC Section 1031) allows deferral of capital gains taxes when you sell ("relinquish") one qualifying property and acquire a "like-kind" replacement property held for productive use in a trade or business or for investment.

For oil and gas properties, this applies to certain real property interests in minerals possessing the following characteristics:

1.) Fee simple mineral interests

2.) Royalty interests and overriding royalty interests (“ORRIs”)

3.) Working Interest (commonly referred to as operating or leasehold interests) in oil and gas mineral leases, provided the interest represents an unlimited economic interest in minerals in place.

There is no special IRS "election" form to file in advance; you qualify the transaction by structuring it properly (using a qualified intermediary, meeting timing rules, etc.) and report it on Form 8824 with your tax return.

Recommended Procedure is as follows:

1.) Plan and determine eligibility prior to listing real property for sale. Ascertain both the relinquished property and intended replacement property qualify as real property held both business and investment use.

2.) Engage a Qualified Intermediary (“QI”) and assign the sales contract as the assignee. To prevent possible constructive receipt of the sales proceeds, the buyer should be notified, preferably in writing, the sales contract has been assigned to the QI.

3.) Effect the final sale of the relinquished property. The buyer would direct the title company or other authorized sales agent to remit all net sales proceeds directly to the QI. Any receipt of “boot” (cash or non-like-kind property which may include payoff of existing liens on the relinquished property) will become taxable income to the exchanger.

4.) Identify Replacement Property within the 45-day period by sending the QI a written signed identification notice.

a.) Three Property Rule – Up to three properties may be identified regardless of the value of the three properties.

b.) Any combination of these three properties may be identified assuming the identification equals or less than 200% of the relinquished property’s value.

c.) 95% rule (for > 200%) Acquire properties worth at least 95% of the total identified value

5.) Close on the replacement property/properties by the earlier of 180 calendar days after the relinquished transfer or your individual return tax-filing deadline (including extensions).

6.) File Form 8824 as part of your current year tax return (Form 1040) for the year of the relinquished property transfer. This form supports the election for the nonrecognition of gain for the exchanged property and provides for the computation of any recognized gain due to the possible receipt of boot. Additionally, this form provides the basis for computing the adjusted basis for the exchanged property received.

In conclusion, a successful 1031 exchange defers (but does not eliminate) gain until you eventually sell without performing additional real property exchanges. 1031 exchanges defer the current year recognition of gain on the sale of oil and gas mineral interests and wells. By electing a 1031 exchange, upon the divestiture of oil and gas working interest, the ordinary income arising from the recapture of intangible drilling costs and depreciation of tangible personal property and any applicable Section 1231 gain may be deferred by electing the 1031 exchange.

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 talk with Mark Lancaster, an energy executive and entrepreneur with more than 30 years of experience in natural gas, power generation, microgrids and energy infrastructure. Mark breaks down how oil and gas operators can turn stranded gas, flared gas and produced water from waste streams into revenue opportunities.

The conversation covers microgrids, data centers, Bitcoin mining, power demand, field electrification, and why self-reliant energy infrastructure is becoming more important across the oilfield.

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