We have never seen anything quite like this before.
There have been wars in the Persian Gulf – at least two of them in living memory. There have been oil price shocks – most famously in the 1970s and 1980s. There have been cost of living crises triggered by war – as we all know, having faced the aftershocks of Russia’s invasion of Ukraine.
But this latest war is holding a knife against the very throat of the economy.
The Strait of Hormuz is the most consequential stretch of water anywhere in the world. Think of the global economy as a giant organism: like all big animals, it needs to be constantly fed.
We stick raw materials – from metals and fuels to minerals and foods – in one end. Out of the other come all that we take for granted, from computers and phones to the power, heat and chemicals that keep us all alive.
And few of those ‘inputs’ are more important than oil and gas.
Many people assume that, in 2026, we have eliminated, or at least are close to eliminating, our dependence on these messy, polluting substances. They are wrong.
Like it or not, the world still needs oceans of oil, not merely to fuel cars, planes and ships, but also to make pharmaceuticals, plastics and a million other goods.
The events of the past few weeks are unnerving, bordering on terrifying, writes Ed Conway
We need gas not just to heat our homes, but to help produce the nitrogen-based fertilisers that grow our foods. No fertilisers, which is to say fossil fuels – and half the world’s population – would be dead.
And here’s the reason this moment is so dangerous. Nowhere has such a concentrated supply of oil and gas as the Persian Gulf.
Yes, there is a wealth of gas in Russia. There is oil aplenty in the layers of shale rock beneath Texas. But even today, after a century or more of intensive drilling, nowhere else can remotely compete with the bountiful oil and gas under the ground in the Gulf.
All of which is why the events of the past few weeks are unnerving, bordering on terrifying.
Consider what just happened to Ras Laffan. Most folks haven’t heard of Ras Laffan – an obscure city of steel pipes and chrome canisters in the deserts north of Qatar City.
But make no mistake, this place is arguably the most important energy production site anywhere on the planet. And last week parts of it were bombed to smithereens by Iranian missiles.
The damage will, according to the bosses there, take years to be repaired. Shipments of gas booked in by Europeans may have to be cancelled all the way through to the next decade. But even that is assuming everything else returns to normal. And right now there’s little sign of that happening.
A hundred or so miles north of Ras Laffan is another critical site with a similarly obscure name, Ras Tanura. It’s where Saudi Arabia loads oil on to tankers to be transported around the world.
But Ras Tanura has been effectively shut down. This isn’t just because of the ever-present risk of Iranian attack – it’s because the oil has nowhere to go.
Motorists queue for petrol during the 1973 oil crisis, also caused by events in the Middle East
In normal times the vast majority of oil and gas from these two hugely important plants left the region in tankers traversing the Strait of Hormuz.
The reason this chokepoint matters so much – even more than the handful of other narrow waterways around the world – is that there is no good alternative.
If ships want to avoid the Bab-el-Mandeb strait, the southern entry-point to the Red Sea – as they have been for some years in the face of attacks from Houthi rebels – they can just take the long route around Africa via the Cape of Good Hope.
But there is no easy way to circumvent the Strait of Hormuz.
The world should hardly be surprised that, faced with an existential threat, Iran has weaponised the economy – attacking ships and effectively closing the Strait to most vessels.
Let me return to my notion of the world economy as a sort of massive organism.
In order to function, it needs about 100 million barrels of oil per day. This is the lifeblood flowing through its system, enabling planes to fly and trade to flow.
The closure of the Strait of Hormuz means that, all of a sudden, we are short of 15 million barrels of oil per day – 20 million if you include the oil transported out of the Gulf in the form of petrol, kerosene or other refined products.
Britons are feeling the effects of the crisis in the price of oil at the pump
An oil rig in the north sea, which has vast reserves of oil and gas which the UK could tap into
The chokepoint is beginning to, well, choke the planet. That is why petrol prices are rising, along with the cost of flights, the cost of heating oil and anything else that begins its life as crude oil.
It is why some countries, from India to Vietnam, are beginning to ration fuel, urging their citizens to work from home and conserve
petrol. It is why anyone who spends any time thinking seriously about the foundations of the global economy is beginning to fret.
For episodes such as this are extremely rare, and this one might soon be the worst ever.
Consider those 15 million barrels of oil we are short of. That deficit is more than four times bigger than anything the world faced in the 1970s or 1980s. It is more than six times the volume of oil lost when Russia invaded Ukraine. It is economic starvation on a scale the world has never seen before.
In the face of this wide gap between the oil the world needs to function and the oil it is actually getting, there are two immediate questions. What happens next? And what can be done to fill the gap?
In terms of what happens next, that depends nearly entirely on whether the Strait is reopened rapidly.
The fact that Donald Trump urged his allies last weekend to send in ships to help rather underlines that despite the President’s early confidence this would be short lived, with little impact on the global economy, he is starting to entertain severe doubts.
It is very hard to envisage a return to normal shipping volumes until Iran and its proxies stop attacking ships in the Strait, and there is little guessing right now how long that will be.
On the one hand, the US military has overwhelming superiority in firepower. On the other hand, this is a scenario the Iranian regime has been war-gaming for decades, and, as it happens, it doesn’t take all that much firepower to disrupt shipping. This is something the Houthis have been demonstrating in the Red Sea for years.
If, for whatever reason, the attacks cease and ships resume passage into and out of the Gulf, the economic impact could be short-lived. Yes, this episode will leave a scar: it will take months to get oil and gas production in the Gulf back to normal. But in the medium term, prices should calm down by next year.
If the Strait remains closed, oil prices will ratchet even higher, perhaps to record levels
But if weeks of closure stretch into months and, God forbid, years, then the consequences will be grisly for all of us.
Oil prices will ratchet even higher, perhaps to record levels. Starved of energy, global economic activity would slump. Pretty much everyone, save for the oil and gas companies outside the Gulf still pumping hydrocarbons, will get poorer.
This would turn into an energy-price shock far worse than the one experienced by Europe in 2022 – except this time spread across most of the world, especially Asia. It would, in short, be catastrophic.
So to that second question: what, if anything, can be done while the Strait of Hormuz stays closed?
The main objective is to fill that 15 million barrel gap. There are some pipelines in the Gulf that can get oil out without having to go via the Strait: in particular the East-West Pipeline that traverses Saudi Arabia. But even in a best-case scenario, this could only carry another five million barrels or so per day.
Rich countries have promised to release 400 million barrels of oil from their stockpiles – supplies of crude stashed away in salt caverns and steel tanks dotted around the world.
This sounds massive, and is indeed the biggest emergency stockpile release in history. The problem is, they can only pump out so much at a time. This might add only another four or five million barrels of oil per day to the global system.
We are still short of five million barrels, which might not sound like much, but is double the impact of the Russia-Ukraine conflict.
And this is assuming everything goes about as well as it could.
You probably get the picture. There is no easy way out of this.
And while this all seems a long way away from Britain, if anything we are more vulnerable to this crisis than most other developed economies.
For one thing, we already have the highest power prices in the developed world, a function in part of the high cost of building out an ambitious wind-power system and in part of our dependence on gas as the main back-up for our grid.
The North Sea, once one of the world’s most productive basins, is now a shadow of its former self, providing a little less than half of the oil we need in this country, and even less of our gas.
The upshot is that this country is a net energy importer, dependent on the very LNG that is no longer being produced in Qatar, vulnerable to the sharp rises in prices across global markets.
These are the consequences of decisions taken years, in some cases decades, ago. Successive governments, especially the current one, have imposed so many taxes and regulations on oil companies that many no longer see much point in exploring the deeper reaches of British waters.
For some green campaigners, this is a mark of success.
They see the decommissioning of the North Sea as an inevitable step on the route towards Net Zero, where the country no longer contributes anything to global carbon emissions.
The problem with this vision is that even in 2050 – the much vaunted year of Net Zero – if everything goes completely to plan, Britain will still be reliant on gas as a backstop for nuclear and intermittent wind and solar energy. This is according to the Government’s own plans.
Unless things change, most of our gas will continue to be imported, some from Norway, some from countries like Qatar and the US.
But squint a bit and there is an alternative scenario, where Britain gets most of its gas from its own North Sea resources. And since the gas comes from closer at hand, it would have even lower emissions than the LNG shipped in from abroad.
However, that would take a sea change in the attitude to oil and gas, both in Britain and further afield.
Until recently, the International Energy Agency was insisting no new oil and gas exploration was needed in the coming decades. Energy Secretary Ed Miliband is planning to write such a stipulation into law. In the intervening years, however, much has changed.
Back in the pre-2022 world, one could reasonably order a barrel of oil or a therm of gas from the other side of the world, so it made sense to yoke Britain’s energy system to countries such as Qatar and Saudi Arabia.
Today, with the world in an economic chokehold, the logic has been turned on its head.
If that wasn’t already obvious, it will become all too clear in the coming months, as we deal with the consequences of a war whose economic fallout has barely begun to be felt.
We must all keep our fingers crossed that this nightmare ends soon, that the Iranians release their hold on the chokepoint in the Persian Gulf. If not, we all face a painful reckoning.
Ed Conway is Economics Editor of Sky News and author of Material World.
