How long can oil markets absorb the Hormuz shock?

{"text":[[{"start":6.8,"text":"The writer, an adjunct senior research scholar at Columbia University’s Center on Global Energy Policy, is on the advisory board of Crystol Energy"}],[{"start":15.95,"text":"Geopolitical volatility is on the rise and economic warfare is rising with it. Traditionally, the oil weapon has been a favourite way to harm an adversary’s economy. Recently, however, it seems to have lost some of its shine. "}],[{"start":30.65,"text":"The on-again, off-again closures of the Strait of Hormuz are ever harder to follow but the prospect of less oil and higher prices has had only a muted impact on the global economy. Reported inflation rates have not escalated, growth forecasts have remained relatively benign and volatility in financial markets appears to have originated elsewhere. Stagflation may be on the cards, but it is no longer commonly framed as an oil price-led phenomenon. "}],[{"start":60.5,"text":"Why the subdued reaction? In a nutshell, because the integrated modern oil market is much better at absorbing shocks than commonly appreciated; and because oil has become a much lighter burden on the global economy than it used to be."}],[{"start":null,"text":"

"}],[{"start":74.7,"text":"The latest crisis hit at an opportune moment. Global oil production exceeded consumption. Inventories, including China’s strategic reserve and unregistered oil stored on tankers, were massive. A rapid shift in global trade flows, including the use of pipelines bypassing Hormuz, helped mitigate the price impact of the initial shock."}],[{"start":95.95,"text":"These workarounds continue. And other supply responses are being added in the form of incremental production increases elsewhere, new pipeline capacity and a reconfiguration of refining and processing capacity globally."}],[{"start":108.5,"text":"Still, a disruption on such a massive scale calls for a demand reaction. According to the International Energy Agency, demand fell by almost 5mn barrels per day in the second quarter of this year, about 5 per cent of total global oil consumption. This has not been triggered by stalling economic activity. For the time being, the decline therefore represents an improvement in the efficiency with which oil is used to produce goods and services, as opposed to a recession dragging oil demand down."}],[{"start":null,"text":""}],[{"start":142.45,"text":"Oil intensity — which measures the relationship between oil consumption and GDP in barrels per dollar — is the broadest measure of the productivity or efficiency of oil use we have. Historically, it has improved immensely and on a steady path since the oil market turmoil of the 1970s. This ongoing improvement matters because it implies that price increases need to be much higher to have the same detrimental economic impact they would have without the improvement."}],[{"start":173.1,"text":"So, for example, today’s oil prices, adjusted for inflation and efficiency gains, would need to be about four times higher to mirror the shock after the Iranian revolution in 1979. That is a very long runway indeed and a key part of why the economy has not reacted more to the price changes we have actually seen in the wake of the Ukraine and Iran wars. In the current price range, lower oil intensity levels mean lower risk of a recession or an inflationary impetus — reducing the need for central banks to act in response to price increases."}],[{"start":208.35,"text":"A look at the improvements in oil intensity that have already happened shows how plausible this balancing act actually is. Combining actual data for the first half of 2026 with GDP and oil demand forecasts for the second half (from the World Bank and IEA) indicates the possible efficiency savings: expected GDP this year will need 3.6mn barrels per day less oil than if oil intensity had remained unchanged from 2025. "}],[{"start":239.15,"text":"It’s not all roses, though. Reduced oil intensity is also due to the removal of easy barrels from the system (oil used wastefully or that was easily substitutable). The remaining barrels are more likely to carry economic load. If prices were to escalate into the required range, the damage could be devastating — no longer measured as a loss of purchasing power but by the costs of impaired economic activities."}],[{"start":264.55,"text":"Taking the leakage that still existed during the height of the military action in the Strait of Hormuz as a given — and allowing for reconfigured pipeline routes, supply increases outside the Gulf region, sustainable inventory withdrawals and other adjustments — yields a gap of somewhere between 5-7mn barrels per day for the rest of this year. The efficiency savings that have already materialised shrink this gap to somewhere between 1.5 and 3.5mn barrels per day."}],[{"start":292.3,"text":"This is the rough volume that will have to be covered either by lower demand or by higher exports through the Strait (or both) to offset the current shortfall. This increase over the minimal existing shipments is by no means a high bar for daily traffic through the Strait going forward. It also allows plenty of scope for volatility, including the current on/off games of war and negotiations. Indeed, both parties have a lot more leeway before things backfire and repercussions for the global economy become serious."}],[{"start":324.3,"text":"Unfortunately, this is not a reason to rejoice. The muted consequences to date could be a recipe for more disruption if they encourage greater risk-taking in the future. The danger is that an economy less vulnerable to oil price risk induces politics to become more reckless. Markets may celebrate the resilience of today’s economy. But this does not mean politicians will have the wisdom to avoid pushing the system to its new limits."}],[{"start":358.65,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1784527055_1312.mp3"}