The Strait of Hormuz closure will become a crisis

Main Street and Wall Street are ignoring the Strait of Hormuz oil crisis. That complacency has a poor historical track record.

According to the IEA's oil market report of May 13, roughly 12.8 million barrels per day are missing from global supply, with Gulf countries shipping about 14.4 million barrels per day less than before the war began in late February. That is not a rounding error.

In the short term, strategic reserves are covering the gap. The U.S. is relatively well positioned — supplied reliably by Canada and the prolific Permian Basin shale fields, and a net oil exporter with the option to cancel exports entirely if domestic shortages emerge. China holds many months of supply in strategic storage.

But oil markets aren't waiting for a shortage to arrive. Sellers of gasoline and diesel in the U.S. have already used higher world prices as cover to raise prices at the pump — averaging around $4.25 per gallon in early June, just as the summer driving season begins. Consumers will notice. When they do, they will cut spending elsewhere.

Economists call it demand destruction — the point where consumers simply buy less of an expensive product. So far the impact has been modest, less than 4 million barrels per day worldwide. The shift to hybrids and electric vehicles is accelerating, but that won't move the needle this summer.

The complacency may also reflect a belief that negotiations between the U.S. and Iran will reopen the Strait soon. Perhaps. But markets are pricing in a quick resolution that may not come.

History is worth consulting here. Economist James Hamilton's landmark study found that nearly every major energy crisis of the past 50 years — the 1973 oil embargo, the 1979 Iranian revolution, the 1990 Gulf War, the 2008 price spike — triggered a recession. Almost every time, without exception. And major stock market corrections arrived in every one of these instances.

There is little reason to think this time will be different.

 

Hilliard MacBeth

 

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