Since the US and Israel launched their war with Iran, the narrow Strait of Hormuz has effectively been shut to shipping traffic. That has disrupted the flow of oil, gas and other essentials from the Gulf States, which normally export about a fifth of the world’s oil.
If you love history and read a bit, try understanding the oil shocks that happened in the 1970s, specifically 1973 and 1979.
This will make you get a grasp of the current situation in Hormuz, disrupting the global oil supply chain. In 1973, Arab oil producers placed an embargo on a group of countries led by the US over their support for Israel during the Yom Kippur War.
That policy came alongside a coordinated cut to oil production. The result was a near quadrupling of oil prices within a few months. This led to fuel rationing in major oil-consuming countries. It triggered a ‘global economic and financial crisis’ with lasting implications. High oil prices fuelled inflation across the board, prompting businesses to cut back further and unemployment to soar.
This had massive knock-on effects, damaging the social fabric of many countries, with widespread strikes, unrest, and rising poverty as many households struggled to make ends meet. A second oil shock came in 1979, with the Iranian Revolution yielding similar effects as the former shock.
The current situation is nothing strange from the 70s experience. So the oil shortages we’ve been seeing are only going to get worse, even if magically the Strait of Hormuz were to reopen tomorrow.
But while the closure of the Strait of Hormuz is disruptive to global supplies, it is important to note that the world today is more resilient.
The oil market is more diverse than it was in the 1970s. Also worth noting is that the overall amount being used relative to the size of the global economy has also dropped significantly. While current prices are high, today’s crisis might not be as severe.
Given the volumetric disruptions we are seeing are significant-arguably among the largest in recent history-the market is far more resilient than in the 1970s. It is more diversified, less oil-intensive, and better equipped with buffers and emergency response mechanisms.
The best-case scenario is to end this conflict as quickly as possible and restore some semblance of stability. The world is also challenged to actively pursue alternative (renewable) energy sources to offer options during such a crisis.
Reserves and efficiency offer some buffer which the episodes in the 1970s lacked, but the raw scale of lost supply makes this impact heavily, with no fast fix in sight.
We will face massive energy costs, not just while this crisis goes on but also for sometime after it’s over, reeling from the shocks.
This means for example embracing E-mobility for transport, clean cooking technologies for households. This will go a long way in ensuring Energy security.