Many economies around the world are running out of oil, but the crude oil markets (particularly the futures) are still drumming along with some higher prices and the inconvenience of the Strait of Hormuz being closed. Why haven’t crude oil markets seized up?
What is it That Keeps Oil Markets Flowing? When U.S. and Israeli warplanes attacked Iran at the beginning of March nearly a record amount of crude oil was already at sea on its way to various delivery points worldwide. The last deliveries of this mega supply of oil were made nearly a month ago, but the processing queue has still been full at various refineries and storage facilities around the world. Now, in the later part of May, those processing queues are emptying out and waiting for more deliveries. The storage capacities at the other end of the queue still have processed fuels in many cases, but they could soon be running out. It’s not clear for sure, but the market’s day of reckoning when the demand greatly exceeds supply could be only one or two months from now. Each month the Strait is closed deprives world oil markets of 1% or more of the world’s oil supply and about 2% of the worlds liquid natural gas (LNG). This can only make the $110 per barrel prices climb higher and higher. It stands to be the greatest crude oil supply shock in world history. If the Strait were to be permanently reopened today, it would still take several months for the world’s oil processers and distributors to ramp up to full production. This could mean a cumulative loss of as many as 4 billion barrels of crude oil, or about 5% or more of last year’s aggregate output.
Airlines Are Faced with Dramatically Increasing Jet Fuel Costs: The supply crush is impacting the various sectors of the market place differently. Motorists must simply pay more at the pump, but airlines could be in serious trouble very soon. With the summer travel season on the horizon Airlines everywhere are expecting the number of flights to increase in aggregate by 3-6% over last year. This could force most to raise ticket prices and/or add fuel surcharges along with cancelling non-profitable flights. But the caveat is the increased demand will meet up with reduced supply owing to the energy shock from the closing of the Strait of Hormuz forcing jet fuel prices up substantially. It becomes more difficult in the short run for airlines to pass increased costs on to its traveling customers, since many tickets for flights taking place in the ensuing weeks were sold before the war began and the Strait closed. Although America, the biggest air travel marketplace, seems well positioned to handle the shortages and the rising costs, there are other issues that could come into play. The West Coast is not connected to the pipeline network that dominates fuel transport in the southern, midwestern, and eastern states, and must import jet fuel from refineries primarily in South Korea, a country struggling with its own supply problems. Europe appears to be ready for the onset of summer, but buffer jet fuel supplies vary from country to country with some having as little leeway as twenty-three days. The spread from crude oil to jet fuel has increased from $20 per barrel to $80 per barrel. Something has to give since the reopening of the Strait is not imminent, and even if it was, it could take months to normalize supply flows. It would be safe to assume that more air carriers other than Spirit Airlines, which closed its doors recently, could be shutting down and potentially stranding passengers in faraway places.
Asian Countries Look for Biofuel Alternatives: The petro fuel energy shock caused by the closing of the Strait of Hormuz has forced a number of Asian countries to seek to extend existing supplies with biofuel additives. Vietnam has mandated a switch on June 1st to E10—a mixture of gasoline that contains 10% ethanol that’s derived from corn, sugar cane, sugar beets, and other organic sources. India has previously set up E20 for the same reason, and is currently looking at other materials for stronger additives. Indonesia has planned a July 1st rollout of a blend of diesel that contains 50% palm-oil, a product that’s plentiful in that country. The Philippines have formulated a blend of diesel that includes a 3% additive of coconut oil. These efforts will extend the supplies of refined oil products, but come at a cost in higher prices for these organic commodities—both for domestic consumption and also export.
Ripple Effects Felt Around the World: Many parts of the world will suffer from the shock waves set off by the Strait closure. It is already being felt in East Africa and parts of Asia (excluding China) that are living from one supply load to the next. Several more will be running short in a few weeks’ time. Latin America is better protecting from supply shocks as there are several large exporters of crude oil, but their total refinery capacity cannot cover their current consumption meaning that they must import certain refined petrochemical products for domestic use. Europe has a larger buffer of crude, but its refineries are configured to process primarily gasoline making them also importers of refined products such as diesel and jet fuels. China maintains a large crude oil reserve and distributes refined fuels to its Asian customers, but in the face of the closing of the Strait, China has decided to discontinue all refined fuel exports leaving many of these consumers searching for other sources. As what should be expected, the poorer countries are grappling with the issue with much more difficulty than the richer ones.
The Entire Event is Inflationary: When supply cannot service demand in any market sector, the price of that commodity or service goes up. Each month that goes by with the Strait of Hormuz closed brings a shorter supply of crude oil to the world’s marketplace. Rising prices for fuels likewise have a rippling effect to modern economies, as most goods of all types require transport from point of origin to point of manufacture to marketplace, and then to the consumer’s point of consumption. Services require transport from a central location to wherever the service is required, along with whatever equipment is needed. A certain amount of regulatory restriction can reduce some fuel consumption, but there’s a longer way to go before demand destruction takes place. This occurs when buyers are priced out of the marketplace. Along with rising fuel costs inflation can spread throughout the other sectors of the economy forcing the Federal Reserve to raise interest rates to protect the currency. Higher interest rates impact both consumer and producer, and will dampen economic growth.
Conclusions: Negotiations to end the war and reopen the Strait have been accentuated by the inclusion of Saudi Arabia, United Arab Emirates, and other Gulf and regional interests at the bargaining table with Iran. Trump indicated that he would be inclined to accept results achieved by this enhanced group, but I believe that if he intends to get everything he wants from Iran, he will need to send in the U.S. Army, committing us to another Mideastern war that will be costly and unpopular.
Sources: The Economist, Times Up, April 25, 2026.
The Economist, Nothing in the Tank, May 2, 2026.
ChatGPT.