What are the implications for the global economy when energy supply chains hit a chokepoint?

The Strait of Hormuz has been effectively closed for three weeks. With around 15 million barrels per day of oil exports and 11 billion cubic feet of gas normally passing through the Strait wiped from global markets, the world continues to grapple with the collapse of trade through the Strait of Hormuz and mounting infrastructure damage.

With competition intensifying for available supplies and little prospect of the Strait reopening soon, what can the rest of the world do to boost supply and what happens to the global economy when prices continue to climb?

The supply gap

Close to 9% of global oil production is now offline, primarily from Saudi Arabia and Iraq. The International Energy Agency released 400 million barrels from strategic petroleum reserves. Saudi Arabia has maximized the Yanbu East-West pipeline. The market still sits short by at least 10 million barrels per day.

Wood Mackenzie estimates the industry could squeeze around 1.8 million barrels per day more than currently forecast from existing projects within a year. At 1.8% of global supply, that's more than some might think. But it requires everything to go well and no large-scale unplanned outages. It still only totals 12% of the volume normally transiting Hormuz and could not prevent the severe ongoing price pressure required to reduce demand.

On the gas side, 3.5 billion cubic feet per day could be added, mainly from the most LNG import-dependent producers. This is only 0.8% of global supply, but more crucially, is 30% of the LNG curtailed in Qatar. The gain is not enough to prevent serious price consequences, but enough to potentially soften some of the blow.

The LNG inflection point

The strike on Qatar's Ras Laffan facilities changed the trajectory. QatarEnergy confirmed that 12 million tonnes per annum of its 77 million tonne capacity are damaged and possibly unavailable for the next three to five years.

The global LNG market was nearing a turning point after four years of tightness caused by the Russian invasion of Ukraine. New projects developed as a result of that war, mainly in the US, are expected to add 35 million tonnes per annum—an 8% increase—to global supply this year.

The loss of export volumes from the Gulf is 6.5 million tonnes per month. The maths is simple. No Gulf exports beyond four or five months will mean annual LNG supply falls, upward pressure on prices through 2026 and demand destruction, particularly in Asia.

What the market reveals

Prices across the oil and product complex reveal the pressures building. As refined product balances tighten, notably for middle distillates, Asia and Europe are in fierce competition for jet cargoes. Crack spreads for jet fuel in Asia and Europe have soared five-fold to $100 per barrel, equivalent to $200 per barrel Brent. Diesel has followed a similar trajectory. The smaller spike in gasoline cracks is due to cuts in refinery runs in Asia where refiners are starved of Gulf crude feedstock.

On March 23rd President Trump surprised the market, announcing that ‘productive’ talks were underway, prompting Brent to drop briefly below US$100/bbl before bouncing back above. However, if a geopolitical stalemate persists, the war drifts on and with inventory outside the Gulf dwindling; prices across the entire crude and product complex will push up.

The economic calculation

For every 10% increase in oil prices, global GDP growth drops by around 0.13 percentage points, according to Wood Mackenzie's Head of Economics, Peter Martin.

A scenario of Brent averaging $90 per barrel in 2026 would be inflationary and could push global GDP growth below 2% this year from the pre-war forecast of 2.5%. Major economies, including the US and Europe, might even slip into recession. A more aggressive scenario of Brent averaging $125 per barrel will lead to a global recession.

Asian countries, heavily dependent on imported oil and LNG, have high economic exposure to the crisis. China is 72% dependent on oil imports, with 47% coming from the Middle East. India is 88% dependent, with 45% from the region. South Korea: 98% and 70%. Japan: 99% and 80%.

The policy response

With a geopolitical stalemate, a war drifting on and inventory outside the Gulf dwindling, prices continue to push up. Governments are scrambling to mitigate the economic impact. India, South Korea, Indonesia, Thailand, Malaysia and Vietnam have started to cushion consumers with price caps for diesel and gasoline.

Sri Lanka's decision to limit gasoline and diesel purchases at the pump and declare Wednesdays a holiday to conserve fuel is an example of things to come. In India, gas is being rationed where city gas distribution is prioritised, while allocation to industrial sectors is halved. In power markets, thermal coal's share in generation will inevitably increase.

Beyond the immediate challenges, the crisis could augur profound changes for the LNG industry. Buyers exposed to LNG from the Gulf will look to diversify supply sources. The biggest risk, however, is that importing countries will reassess LNG's role in energy policy. What began as a supply disruption is becoming a stress test of global energy architecture and the investment decisions that will define the next decade.