Energy & resources, explained.
In 1973, a 14% drop in global supply during the Arab oil embargo quadrupled prices and triggered economic chaos across the West (Getty Images)
The cascading effects of even minor disruptions are too often ignored. It’s time to reassess the risk.
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The new energy shock: Complacency in oil markets could ignite a global crisisThe new energy shock: Complacency in oil markets could ignite a global crisis
There is a haunting predictability in the way markets shrug off geopolitical risk. Oil prices languish near their 52-week low, even as tensions in the Middle East simmer toward a boil. For anyone who has followed energy markets since the Arab oil embargo of the 1970s, this complacency feels not just misplaced but ominously naïve.
Consider the numbers. Roughly 20% of the world’s daily oil supply – 20 million barrels accounting for nearly 30% of world oil trade – flows through the Strait of Hormuz, the narrow chokepoint separating Iran from the Arabian Peninsula. In 1973, a 14% drop in global supply during the Arab oil embargo quadrupled prices and triggered economic chaos across the West. Today, an outright closure of the strait would dwarf that shock. Crude prices could spike to US$300 per barrel or higher, delivering a blow that global economies, already grappling with inflation and slowing growth are ill-prepared to absorb.
Why are markets underestimating such a significant existential risk? The explanation can be found in a combination of technological overconfidence and misplaced trust in contemporary systems. Logistics and inventory management have seen remarkable advancements since the 1970s. The capability to reroute tankers during voyages and the existence of substantial strategic petroleum reserves impart a sense of resilience. However, like any illusion, this sense of security diminishes upon closer examination.
Policymakers, particularly in the West, have placed considerable reliance on the US shale revolution as a safeguard against foreign supply shocks.
Iran’s geopolitical strategy exemplifies this phenomenon. Its asymmetric tactics, supporting proxies such as Hezbollah, threatening crucial shipping lanes, and capitalising on the West’s psychological unpreparedness, are designed to create maximum disruption at minimal expense. Iran’s military approach focuses not on conventional warfare but on exploiting vulnerabilities, particularly in commercial shipping. With missiles capable of overwhelming even US naval defences, Tehran can effectively impede traffic through Hormuz without firing a single shot. The mere existence of a credible threat would make the strait practically impassable, as insurers would withdraw coverage and shipping firms would hastily vacate the area.
The geopolitical context only heightens this uncertainty. As of 2024, Israel’s intelligence assessments indicate that Iran may only be two years away from achieving nuclear breakout capability. Israeli officials have unequivocally stated their intent to act decisively to prevent Tehran from obtaining this ultimate deterrent. Such intervention would likely trigger a series of retaliatory actions, beginning with Iran’s attempt to blockade the strait. The consequences could mirror those of 1973, but on a scale that would resonate far beyond oil markets.
This is not merely conjecture. One should consider the cascading effects of even minor disruptions. In 2008, oil prices soared to $147 per barrel as demand slightly outpaced supply. Currently, global consumption stands around 102 million barrels per day, with demand proving notably inelastic. A sudden reduction of just five million barrels – one-quarter of the volume transported through Hormuz – would trigger a supply shock that the markets have evidently not anticipated.
The complacency is not confined to oil traders; policymakers, particularly in the West, have placed considerable reliance on the US shale revolution as a safeguard against foreign supply shocks. While it is accurate that US production has risen above 13 million barrels per day, this increase cannot compensate for disruptions in Middle Eastern supply. Even under ideal circumstances, the US might augment production by 1.5 million barrels per day within a year – far from sufficient to cover a 20-million-barrel deficit.
The global economy is fundamentally oil-dependent, but it also relies on trust.
The implications extend beyond mere oil pricing to encompass the delicate fabric of global stability that hinges upon it. Elevated energy costs exacerbate existing crises, potentially driving inflation, an ongoing concern for central banks, into an uncontrollable state. The costs of food and transportation may surge dramatically, intensifying unrest in countries reliant on imports from regions such as Sub-Saharan Africa and Southeast Asia. Developed markets are equally susceptible to pressure, with recessionary conditions nearly inevitable in both Europe and the United States.
What actions can be undertaken? For investors, now is the opportune moment to reassess the energy sector which has become significantly undervalued. The exploration and production (E&P) industry, currently trading at historical lows in relation to the broader market, presents not only defensive strategies but also asymmetric opportunities should disruptions occur. For government entities, the focus should shift towards revitalising energy security initiatives, which should include investment in strategic reserves, supply chain diversification, and a renewed emphasis on renewable energy as a long-term stabilising force.
On a broader scale, the West must adjust its perception of energy risk. It is insufficient to prepare solely for predictable disruptions; we must also mitigate against unlikely tail risks that may suddenly materialise. The Arab oil embargo of 1973 caught the world off-guard not due to its unforeseeable nature but because of widespread disbelief that it could occur. Now, fifty years later, we find ourselves on the brink of a similar situation with significantly higher stakes.
The global economy is fundamentally oil-dependent, but it also relies on trust – the expectation that markets will operate smoothly, supply chains will remain intact, and geopolitical tensions will be contained. This trust, however, is precarious. Should it falter, the repercussions will extend beyond mere financial metrics; they will manifest in disrupted lives, destabilised governments, and the reversal of decades of economic advancement.
The time to act is now, before the perception of energy security transforms into its greatest vulnerability.
About the author
Patricia Schouker
Patricia Schouker is the founder of Energy Bridge Global based in Washington DC and Non-Resident Fellow at Payne Institute.
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