Could this energy crisis be worse for the global economy than COVID?

Negotiations between the US and Iran haven’t reopened the Strait of Hormuz, causing a significant oil supply loss. This disruption mirrors COVID’s demand shock, raising prices and affecting economies long-term. Emergency reserves provide temporary relief.

Despite reports of negotiations between the US and the Iranian regime, the Strait of Hormuz remains effectively closed to most oil tankers, with only a small number of vessels being allowed to pass. The result is a loss of roughly 11 million barrels per day (mbd) of oil and petroleum liquids to the global market. This represents just over 10% of global supply.

At first glance, a 10% disruption may not sound catastrophic. But in oil markets, even a 10% imbalance between supply and demand can have very large economic effects.

To understand the scale of the disruption, it is useful to compare it with the height of the COVID pandemic in 2020. During global lockdowns, empty roads, grounded aircraft and deserted bus and railway stations became normal as travel and economic activity collapsed. At that time, global oil demand fell by about 8mbd, the largest demand shock in history.

Today’s situation is the opposite. Instead of a collapse in demand, the world is experiencing a large supply shock. But the impact on everyday life could end up looking similar: reduced travel, higher transport costs, slower economic activity and pressure on household budgets.

The reason is that both oil supply and oil demand are very inflexible in the short term. People still need to drive to work, goods still need to be transported and aircraft still need fuel. When supply falls suddenly, prices must rise significantly to force demand down.

For now, the release of emergency oil stocks is helping to cushion the initial impact, particularly in developed economies. Members of the International Energy Agency (IEA) are required to hold emergency stocks equivalent to at least 90 days of oil consumption, and several countries also maintain strategic petroleum reserves.

Countries such as the US, China and Japan can therefore offset supply disruptions for a limited period. However, these reserves are not a long-term solution. If the conflict continues for months rather than weeks, stockpiles will be depleted.

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