The war in Iran has already created the largest disruption in the history of the global oil market, according to the International Energy Agency, and the situation could worsen even further.
Iran has vowed to sink any ship attempting to pass through the Strait of Hormuz, the waterway responsible for transporting a fifth of the world’s oil reserves.
In an interview with Fox News on Wednesday, U.S. Energy Secretary Chris Wright stated that the strait will reopen "hopefully in the next few weeks." Note the adverb, as The Atlantic points out in an analysis trying to anticipate what would happen if oil prices were to soar to an unimaginable level.
And Donald Trump announced on Saturday that "one way or another," the United States will soon unlock the Strait of Hormuz and make it "safe and free!" Once again, a promise in vague terms.
Where the price hike started and where it could go
Before the United States attacked Iran, crude oil was trading at around $65 per barrel. Yesterday, the price reached $101.18 at the close of the market, according to CNN.
How much more could it rise? Ebrahim Zolfaqari, spokesman for the Iranian military command headquarters Khatam al-Anbiya, stated that the world should "prepare for oil to reach $200 per barrel."
According to several energy experts, if the Strait of Hormuz remains closed even for a month - in a scenario where the U.S. and Israel do not quickly defeat the Iranian navy and neutralize its sabotage capacity - the $200 level may not be an exaggeration, the analysis shows.
In such a scenario, sustained higher oil prices could plunge the world into a recession, increase borrowing costs, alter the outcomes of ongoing wars, and shift the global power competition balance in favor of Russia and China. "We would enter a completely different world," said Meghan O'Sullivan, director of the Energy Geopolitics Project at the Harvard Kennedy School.
Serious consequences for the U.S.
For America, as well as Europe, the clearest consequence of a prolonged energy crisis would be higher prices, not just for gas.
Oil is a crucial source for nearly every sector of the American economy: the fertilizers needed for food cultivation, the fuel used to power planes and deliver packages, the chemicals and plastics used for manufacturing goods. In other words, when oil prices rise, everything costs more.
Historically, consumers tend to respond to major energy price shocks by cutting expenses in other areas. When the economy is in full swing, this is not as big of a problem. But at this moment, in the United States, the labor market is already shrinking, economic growth is slowing, and consumer spending is already declining.
Several economists have said that in this context, a sudden drop in consumer spending could trigger a total recession in the U.S. Faced with lower demand from consumers, companies that have already stopped hiring new workers could start laying off existing ones. The laid-off workers would further reduce their spending, leading to more layoffs and spending reductions, and so on. This cycle could persist even after the initial oil shock is resolved.
In normal times, the Federal Reserve could limit the damage by drastically cutting interest rates to stimulate the economy. But if the central bank is simultaneously concerned about an inflationary spiral, it would be much more likely to keep rates high or raise them further to keep prices in check - a move that could make an economic contraction even more severe.
Bad news for Europe
On the other hand, the country that would benefit the most from a prolonged oil crisis is Russia, and this is the worst-case scenario for Europe, which hoped that sanctions imposed on Moscow would suffocate the Russian economy and cripple the Kremlin's war machine.
Unlike the U.S., the Russian state directly controls the vast oil resources in the country, which means that a price increase would generate a huge gain for Putin's government. This money could be used to mitigate the impact of Western economic sanctions or to directly fund the war effort in Ukraine, the analysis shows.
The fact that so many countries would desperately need oil would also give Putin an additional advantage in negotiations regarding the outcome of this war, O'Sullivan said. Donald Trump has already temporarily waived some sanctions on Russian oil sales, and his administration is considering lifting more of them.
China, the big long-term winner
But how would America's biggest geopolitical adversary fare? In the short term, China would be in a more precarious position. It is the world's largest oil importer and buys over half of its supply from the Middle East. This makes it extremely vulnerable to a global supply crisis.
However, in the long term, China has two major advantages:
- the first is that it has accumulated the largest surplus reserve of oil in the world - about 1.2 billion barrels, equivalent to nearly four months of seaborne imports - awaiting a moment like this.
- the second is that it has spent the last three decades developing alternative energy sources.
As Jason Bordoff, founding director of the Center on Global Energy Policy at Columbia University, emphasizes in an essay on foreign policy, more than half of the cars sold in China today are electric, the country hosts nearly half of the nuclear reactors under construction worldwide, and almost all of the country's electricity demand growth has been met with green energy sources. For this reason, experts cited by the American publication believe that a prolonged oil crisis could ultimately strengthen China's geopolitical position.
The change that fear of climate change has not triggered
A seismic shock to the global energy system would push world leaders to rethink their own dependence on foreign oil imports. The fear of energy security could achieve what the fear of climate change has never been able to, the publication writes.
"If oil remains on this roller coaster, people will certainly look for alternatives. The main selling point for oil has always been that it is stable. But it doesn't seem so stable at the moment," said Bob McNally, president of the Rapidan Energy Group, a top energy consultancy.
Such a change would make other nations more dependent on China. This country produces over 60% of the world's wind turbines, over 70% of lithium-ion batteries and electric vehicles, over 80% of the world's solar panels, and nearly 90% of processed rare earth minerals that are essential inputs for such technologies.
Europe and Canada have long considered the prospect of relying on China for these resources as an unacceptable risk. An extended oil crisis, caused by an American-led war, could change this calculus. "I don't think it would be crazy, after all this, for countries to start seeing China as the least bad option from a menu with many bad options," Bordoff said.
These are just a few of the consequences we can foresee. The most significant ones may be those we cannot predict. The 1970s energy crisis in the U.S. is often attributed to contributing to the destruction of the New Deal order and sparking a libertarian economic revolution. Who knows what revolutions it would inspire, what institutions a new oil crisis would create, concludes The Atlantic.