Is the Energy Crisis More Detrimental to the Global Economy than COVID?

Negotiations haven’t reopened the Strait of Hormuz, causing an 11 mbd oil supply loss, mimicking COVID’s demand shock. Prices rise, impacting economies; emergency reserves offer only temporary relief.

Key Points

• Ongoing US-Iran negotiations haven’t reopened the Strait of Hormuz, leading to a loss of about 11 million barrels per day (mbd) in global oil supply, which is over 10% of the total. Prices are rising, echoing the economic effects seen during COVID.
• Unlike the demand shock of 2020, today’s situation is a significant supply shock, causing reduced travel and higher transport costs. Both oil supply and demand remain inflexible, forcing prices to rise sharply.
• While emergency oil stocks provide temporary relief, they are not a long-term solution. Extended conflict could deplete reserves in countries like the US, China, and Japan.

Negotiations between the U.S. and Iran have failed to reopen the critically important Strait of Hormuz, resulting in a substantial disruption in oil supply. Currently, only a limited number of oil tankers are permitted to navigate this crucial route, causing an estimated loss of approximately 11 million barrels per day (mbd) of oil and petroleum liquids to the global market. This accounts for more than 10% of the world’s total oil supply, a seemingly manageable figure that belies its potential catastrophic economic implications within oil markets.

The situation is reminiscent of the demand shock experienced during the COVID-19 pandemic when global oil demand fell dramatically due to widespread lockdowns, reducing consumption by around 8 mbd—the most significant drop in history. Today, however, rather than a decline in demand, the world is confronted with a severe supply shock from Iran, leading to increased oil prices, reduced travel, and higher transportation costs, which in turn compress household budgets and slow economic growth.

Both oil supply and demand exhibit considerable inflexibility in the short term; people still need to commute and goods need transportation, which means that when supply diminishes, prices must escalate sharply to curtail demand. To alleviate the immediate economic fallout from this supply disruption, emergency oil reserves are being tapped. Countries such as the U.S., China, and Japan, which are members of the International Energy Agency (IEA), have stockpiled reserves that equate to at least 90 days of consumption. This measure provides temporary mitigation, especially for developed economies.

However, these emergency stocks are not sustainable solutions. Should the conflict persist for an extended period, the reserves will ultimately be consumed, intensifying the economic strain on global markets. The ongoing instability underscores the intricate balance of supply and demand in the oil sector and the far-reaching implications of geopolitical tensions on the global economy.

Read the original article : Could this energy crisis be worse for the global economy than COVID?