Oil Demand Shock From Hormuz
· dev
Are We Misreading The Oil Demand Shock From Hormuz?
The conventional wisdom on the US and Israeli strikes against Iran suggests that a short war would soon give way to a return to pre-war oil prices. However, mainstream energy forecasters, including those at the International Energy Agency (IEA), have projected a contraction in global oil demand in 2023 before it flips back to growth in the fourth quarter of that year.
But what if this narrative is being rewritten as we speak? The prolonged conflict has resulted in a significant reduction in global oil production, with prices failing to come down despite initial expectations. Even when the Strait of Hormuz reopens, oil exports from the region are unlikely to return to normal anytime soon.
The scale of demand destruction so far is staggering. Global oil inventories have been depleted by more than 5 million barrels per day relative to pre-war levels, and demand itself has dropped by over 3 million barrels per day – roughly equivalent to Japan’s total oil consumption. This contraction in demand is being felt particularly in transportation.
In Asia, road transport demand has contracted significantly, while in the US, moderate demand destruction is evident as higher prices lead to reduced driving habits. Moreover, the accelerating shift towards electric vehicles (EVs) is a pressing concern. Higher oil prices following the Hormuz crisis seem to be pushing the transition to EVs into high gear.
In July this year, sales of EVs in “new markets” – excluding China, Europe, and North America – jumped by 97% compared to the same month last year. The ripple effects of this prolonged crisis will be felt for months to come, especially in shipping and aviation where realistic alternatives are scarce. However, there’s a hint of price sensitivity, particularly when it comes to leisure aviation demand.
The history of sustained supply constraints shows that they can lead to permanent demand destruction – what we might call “material replacement”. The 1973 and 1979 oil shocks introduced fuel-efficiency standards and the replacement of oil-fired power generation, introducing permanent changes. Similarly, the recent 2022 gas crisis in Europe accelerated the region’s transition away from imported energy.
The ongoing attacks by Iran-backed Houthi militia against the Bab al-Mandab Strait are exacerbating an already precarious situation, making quick normalization even less likely. For every month this conflict continues, the probability of permanent demand destruction increases.
A prolonged crisis and “higher-for-longer” oil prices will create structural and permanent changes in behavior, rather than just temporary adjustments or delayed demand. As we navigate the uncertain landscape ahead, it’s essential to factor in an increased risk of a lasting Hormuz crisis and an elevated probability of permanent oil demand destruction.
The implications of this prolonged crisis are far-reaching, and energy forecasters will need to revise their projections accordingly. Governments and corporations must respond to these changing market dynamics with a clear understanding that the status quo is no longer sufficient. The stakes are high, but so is the reward for getting it right – reimagining a more sustainable energy future requires a fundamental shift in our assumptions about global oil markets.
Reader Views
- AKAsha K. · self-taught dev
The Strait of Hormuz is just the tip of the iceberg - what we're seeing now is a global reckoning with oil's diminishing relevance. The article highlights demand destruction, but doesn't fully explore how this disruption will shape emerging markets' energy policies. As developing nations scramble to cushion their economies from price shocks, they'll be forced to accelerate their own transition plans, making the EV market even more attractive for investors. The aftermath of this crisis won't just reshape global oil dynamics; it'll also catalyze a seismic shift in transportation infrastructure worldwide.
- TSThe Stack Desk · editorial
The war in Hormuz has done more than just disrupt oil supplies – it's accelerating a fundamental shift in how we consume energy. The article mentions a 97% surge in EV sales outside of major markets, but that's just the tip of the iceberg. As higher fuel prices become the new normal, governments and corporations will be forced to reevaluate their transportation infrastructure, with electrification of shipping and aviation likely to follow. This crisis is an opportunity for industries to leapfrog to cleaner technologies, but only if policymakers seize it – a chance they can't afford to miss.
- QSQuinn S. · senior engineer
The IEA's doom-and-gloom projections for oil demand seem increasingly irrelevant in light of the Hormuz crisis. What's striking is how little attention has been paid to the cascading effects on supply chains and logistics. We're not just talking about a short-term spike in fuel prices – the prolonged disruption will likely accelerate the shift towards renewable energy sources, particularly in Asia where governments are already investing heavily in green infrastructure. This could be a turning point for the oil industry, one that policymakers would do well to recognize and prepare for.