Strait of Hormuz Closure: Global Shortages Loom, Warns Nick Butler

Since late February, the Strait of Hormuz closure has halted tanker shipments of essential commodities like oil, LNG, and refined products. Nick Butler, formerly of BP and now at King’s College London, warns this will lead to real physical shortages, moving beyond imaginary ones, necessitating demand suppression through rationing and recession.

Butler highlights that infrastructure targeting, primarily by Iran, has damaged at least eight significant Gulf refineries and Qatar’s Ras Laffan LNG facility. The impact extends beyond crude oil, disproportionately affecting specific refined products like jet fuel and diesel, which were exported in millions of barrels daily to Asian and European markets. Simple substitution is not possible due to refinery design and product-specific needs, meaning even the US, a net exporter, relies on specific crude imports.

Initial impacts were muted by drawing down finite stocks. Expanding production outside the Gulf or rerouting oil is difficult in the medium term, as most spare capacity is within the Gulf or Russia, which has limited capacity and political hurdles. Replacing lost refining capacity would be costly and time-consuming, especially given years of decline in European capacity.

The shortages are not limited to energy, affecting helium, naphtha, methanol, phosphates, urea, ammonia, and sulphur. Reduced helium supply impacts microchip production, while cuts in fertiliser components threaten global food production. Longer shipping routes also increase costs and have stranded 20,000 seafarers in the Gulf. Despite market optimism for a ceasefire, Butler questions the likelihood of Iran surrendering control or Trump accepting tolls, suggesting prices could soar due to inelastic demand, leading to inflation and recession. Fatih Birol of the IEA warns this could be the biggest energy crisis in history.