Prolonged degradation of the route means chronically higher energy prices, more expensive logistics, and weaker consumption growth.
The armed conflict between the USA and Israel on one side and Iran on the other, which has involved half of the countries in the Middle East, has reflected in the economic sphere as a sharp rise in oil prices. The May futures for the delivery of the benchmark Brent crude rose above $80 per barrel at one point.
In addition, Reuters reports that the Qatari state oil and gas company Qatar Energy is preparing to declare force majeure regarding liquefied natural gas (LNG) supplies. Against this backdrop, gas prices in Europe have risen by 40%.
Such sharp fluctuations are more indicative of the emotional behavior of market participants. Separating the emotional component from the real consequences of the conflict for the economy was aided by Vladimir Chernov, an analyst at Freedom Finance Global, in an interview with Fontanka.
"Iran has moved to strikes on processing, and the risks of disruptions in hydrocarbon supplies through the Strait of Hormuz are no longer abstract. According to reports from Reuters and Argus, after the attacks and interceptions, Saudi Aramco halted operations at the Ras Tanura refinery with a capacity of about 550,000 barrels per day, and the passage of vessels through the Strait of Hormuz has sharply decreased, with some tankers damaged and about 150 vessels effectively 'trapped' in the strait area. At one point, the price of Brent rose to $82 per barrel against this backdrop, before retreating closer to $78–79.
If the conflict ends quickly, within a month, the main effect will be through the risk premium and logistics. Oil and gas will remain more expensive than usual, but the market will live on expectations rather than in a situation of real barrel shortages. The most sensitive channel for the global economy here is fuel inflation, rising freight and insurance costs, plus business nervousness. In such a scenario, the risk of recession in the world increases not due to oil shortages, but due to a surge in uncertainty and rising logistics costs. In the case of de-escalation, the premium usually 'deflates' quickly, and prices return closer to fundamental levels of supply and demand.
If tensions last for several months, then a second layer of effects accumulates. First, not only oil becomes more expensive, but the entire chain does as well. Freight, insurance, delivery times, stocks at refineries, spreads on petroleum products. Second, companies start to restructure routes and hold more stocks. This is inflationary in itself. Third, central banks get a worse picture of inflation and may keep rates higher for longer than they would like. For the global economy, this is a scenario of slowdown rather than an immediate halt.
If the conflict drags on for more than a year, and strikes on refineries and restrictions in Hormuz become regular, then the risks will become systemic. The Strait of Hormuz typically allows about one-fifth of global oil flows and significant volumes of LNG. Prolonged degradation of the route means chronically higher energy prices, more expensive logistics, and weaker consumption growth, which for importers in Asia and Europe translates into a worsening trade balance.
