The oil shock the world feared

Brent crude shot above $100 a barrel after war broke out in the Persian Gulf on 28 February. The fighting cut shipping through the Strait of Hormuz and took twenty per cent of the world's seaborne oil off the market overnight. Energy traders had feared this for half a century.

Half a century of dread

The fear dates from the 1970s. The Arab oil embargo of 1973 roughly quadrupled the price of crude, and the Iranian revolution of 1979 more than doubled it again, but neither closed the strait. During the Iran-Iraq war in the 1980s both sides attacked tankers in the Gulf, and from 1987 the American navy escorted reflagged Kuwaiti tankers through the waterway, yet traffic kept moving. Even Iraq's invasion of Kuwait in 1990, which doubled the oil price within months, left the strait open. Planners have gamed a full closure for decades precisely because it had never happened.

Hormuz shuts

Roughly twenty million barrels of crude and refined products pass through the strait each day, and there is no other route for most of it. Naval drones have hit commercial tankers and marine insurers have cancelled war-risk cover across the board, so tanker traffic has stopped. No pipeline network or strategic reserve can make up for twenty million barrels a day of lost supply.

The geography leaves little room for manoeuvre. At its narrowest the strait is about twenty miles wide, and the shipping lanes within it are far narrower, so a vessel cannot easily keep its distance from a threat. The bypass routes are limited to Saudi Arabia's pipeline across the desert to the Red Sea and a smaller line from the United Arab Emirates' fields to Fujairah on the Gulf of Oman. Together they can carry only a fraction of normal flows, and Kuwait, Iraq, Qatar and Bahrain have nothing comparable.

The insurance market acts faster than any navy. War-risk cover for ships is written separately from ordinary hull insurance, and policies typically allow underwriters to cancel or reprice at short notice when an area becomes dangerous. The Joint War Committee in London maintains a list of high-risk areas, and once cover is withdrawn, shipowners cannot meet the terms of their loans or charters by sailing uninsured. The Red Sea showed how this works in practice: after attacks on shipping began in late 2023, most large container lines diverted round the Cape of Good Hope rather than pay for the risk, and traffic through the Suez Canal fell sharply for more than a year.

More than oil is trapped

Crude is only part of the cargo. Qatar, one of the world's largest exporters of liquefied natural gas, ships almost all of it through the strait, so the closure also removes a large share of global LNG supply at a stroke. Europe, which replaced much of its Russian pipeline gas with LNG after 2022, and Asian buyers who rely on Qatari cargoes will compete for what remains, and gas prices will feed into electricity bills and fertiliser costs as well as into industry.

The spare capacity that normally cushions supply shocks is in the wrong place. Most of the world's unused production capacity sits in Saudi Arabia, the UAE and Kuwait, behind the very strait that has closed. In past disruptions, from the Libyan civil war in 2011 to the attack on Saudi processing facilities at Abqaiq in 2019, the market calmed partly because Gulf producers could pump more. That safety valve is shut too.

Higher prices, weaker growth

The result is a stagflationary shock of historic size, and nobody is hedged for it. Dearer crude, bunker fuel and refined products act as a tax on demand around the world, and they push up costs in shipping, petrochemicals and farming.

The tax analogy is exact in one respect: the money goes somewhere. Consumers in importing countries hand more of their income to producers outside the war zone, who tend to spend it more slowly, so global demand weakens even as prices rise. Central banks then face a choice they dislike, between tightening to stop higher fuel costs spreading into wages and other prices, and easing to cushion the slowdown. The 1970s showed the cost of accommodating a shock of this kind; the early 1980s showed the cost of squeezing it out.

Who gains and who pays

Producers outside the Gulf are the obvious gainers: American shale drillers, Norway, Canada, Brazil and Guyana can sell every barrel they produce at a much higher price, although shale output takes months to respond because new wells must be drilled and completed. Owners of tankers operating outside the Gulf also profit, as longer voyages and scarce vessels push freight rates up. The heaviest losers are import-dependent economies in Asia and Europe, airlines, chemical makers, farmers facing dearer diesel and fertiliser, and households on low incomes, for whom fuel and food take a larger share of spending.

America sits in an unusual position. It has been a net exporter of petroleum on an annual basis since 2020, so the country as a whole gains from higher prices through its producers, even as its consumers pay more at the pump. That cushions the national income but not the household budget, because petrol is priced off world markets and drivers in Ohio pay the same crude price as refiners in Rotterdam.

Why it may not last

The strongest counterargument is that closures tend to be shorter than the panic assumes. Navies can escort convoys, as the Americans did in the 1980s, insurers return once they judge the risk priced, and very high prices destroy demand quickly. Governments hold strategic stocks for exactly this case, and the members of the International Energy Agency are obliged to keep reserves equal to at least 90 days of net imports. Those buffers can buy time, but they are measured in weeks of lost Hormuz flow rather than months, and nothing replaces the physical passage of tankers.

The signals to watch are tanker movements through the strait, the stance of war-risk underwriters in London, any coordinated release of emergency stocks by the IEA, and the spread between Brent and Dubai crude, which shows how tight Gulf-grade supply has become. With Hormuz closed, talk of falling inflation is over. Governments will probably have to ration fuel before long, and oil will likely stay above $100 for as long as the strait stays shut.