The war in Iran that began on February 28 disrupted traffic through the Strait of Hormuz and triggered the largest single disruption to global oil markets in history. Washington and Tehran agreed to a ceasefire in April but the Strait remains effectively closed to commercial shipping, with just 10 vessels transiting per day against a pre-crisis baseline of 95.

It was under this backdrop that Antonio Fatás, Professor of Economics at INSEAD, and Adi Imsirovic, energy markets expert and guest lecturer at the University of Oxford, sat down for a recent Lifelong Learning webinar to discuss what the conflict means for inflation, central banks and the global outlook.

Imsirovic opened by observing that the closure of the Strait cut off roughly 20% of global oil flows. Although both Saudi Arabia and the United Arab Emirates have ramped up production, and the International Energy Agency has also responded in March with its largest-ever emergency release of 400 million barrels, global oil stocks have been draining fast.

Imsirovic warned what prolonged closure of the Strait would mean. "If oil does not come out somewhere in June, we could be seeing some very, very ugly things," he said. He described the level of stocks below which refineries start shutting down, pipelines run dry and the knock-on effects become self-reinforcing. At the current rate of drawdown, he warned, that threshold could be reached within weeks, and prices would spike.

Fatás took on the macroeconomic implications. He explained that the main impact has been on Asia, especially Bangladesh, Pakistan and Southeast Asia, “because 80% to 90% of all that oil was going to Asia” and these countries didn’t have much reserves. Energy-importing countries will simply become poorer, and economies need to adjust to this shock. 

"If we are poorer, we are poorer. There's no way to just throw money at the problem and pretend that an economy does not need to adjust," said Fatás, who is also the Portuguese Council Chaired Professor of European Studies at INSEAD.

International Monetary Fund scenarios show growth revisions of up to two percentage points for energy-importing regions, with inflation climbing further still. For the Eurozone, an oil price sustained at US$120 will tip growth into negative territory. Central banks face an especially difficult position. Fatás pointed out that their credibility took a hit during Covid-19 when they called inflation transitory. Ten-year interest rates have been rising across the United States, United Kingdom and Eurozone, with the UK showing the sharpest moves.

For business leaders, both Fatás and Imsirovic pointed to the same risk factor above all others: time. Scenario-planning should treat the duration of the US-Iran standoff, and not just oil prices, as the critical variable to watch.