Oil Crisis: Expert Warns of ‘Great Depression’-Level Impact on Global Markets

The global financial markets, particularly the futures market, appear to be underestimating the severity of the potential disruption stemming from tensions in the Strait of Hormuz, according to oil analyst Lori Johnston. Johnston voiced concerns that the current situation could cripple the oil system, warning of a potential economic downturn rivaling the Great Depression.

A Crisis Unlike 2022

Johnston, speaking in recent interviews with the Harvard Business Review and Wired, described the current situation as a scenario previously used as a teaching tool for latest analysts – a hypothetical crisis akin to gravity suddenly ceasing for ten minutes. “I’m frankly terrified this shock is too big, and the oil system is going to buckle and break,” she told Harvard Business Review. This assessment contrasts sharply with the market’s reaction, where Brent crude futures were trading at $102.22 per barrel and West Texas Intermediate (WTI) at $90.32 on March 25th, indicating a downward trend. However, experts suggest focusing on the price of Dubai crude, which reached $160 per barrel, to gauge the potential for further price increases. The Wall Street Journal warned that if the Strait of Hormuz doesn’t reopen quickly, Dubai crude’s record prices will likely spread to Brent and WTI.

The situation is particularly acute for Gulf oil-producing nations like Iraq and Kuwait, which have been forced to halt oil production due to blocked export routes, leaving them with no storage capacity. Currently, approximately 10 million barrels per day of production – roughly 10% of global supply – is offline. The total amount of oil unable to be transported through the Strait of Hormuz reaches 20 million barrels per day, representing a fifth of global supply. This dwarfs the 4.5 million barrels per day shortfall experienced during the 1973 oil embargo, which represented about 7% of global supply at the time.

Supply Shock and Global Impact

Johnston argues that markets are lulled into a false sense of security by successfully navigating the energy crisis triggered by the war in Ukraine in 2022. “People have become complacent about the resilience of the oil system as they got through the Ukraine war relatively unscathed,” she explained. However, she emphasizes a critical difference: although the Ukraine conflict initially raised concerns about a 3 million barrel per day supply loss, the actual disruption was limited to 1 million barrels. “Now, we’re not talking about a ‘worry’ – we’re talking about an actual 20 million barrel per day supply loss.”

The International Energy Agency (IEA) echoes these concerns. IEA Executive Director Fatih Birol previously stated that the current crisis is equivalent to the combined impact of the two oil shocks of the 1970s and the gas supply shock following Russia’s invasion of Ukraine, arguing that financial markets are underestimating its severity.

The immediate consequences are already being felt. Reduced oil supply is leading to demand destruction, with potential declines in vehicle usage and air travel. Developing nations in Asia, Africa, and the Middle East are disproportionately affected. In Kenya’s Nairobi, fuel shortages have led to panic buying and reports of abandoned vehicles as drivers are unable to afford to fill their tanks, according to local media like The Star. Several countries, including Egypt and Sri Lanka, have implemented fuel rationing, while others are restricting business hours.

Philippines Declares Energy Emergency

The Philippines, with only a 45-day supply of oil reserves, has declared a “national energy emergency.” President Ferdinand Marcos Jr. Told Bloomberg that while he hopes for a swift resolution, the possibility of flight cancellations is not off the table.

Beyond Immediate Disruption

Even if negotiations between the U.S. And Iran lead to an immediate reopening of the Strait of Hormuz, the Economist reports that it will take at least four months for oil flows to normalize, with repercussions potentially lasting into the winter. Restarting halted production requires inspecting and repressurizing pipelines (2-4 weeks) and potentially longer for gas fields (up to 7 weeks). Shipping companies may be hesitant to resume operations due to continued fears of attacks, and marine insurance rates are unlikely to fall quickly.

The disruption also impacts Asian refineries, which have already reduced processing by approximately 8% – around 3 million barrels per day. Even with a resumption of Middle Eastern oil supplies, it will take weeks or months to fully restart idled facilities.

A Descent into “Great Depression” Levels?

The most dire scenario involves a prolonged conflict, potentially escalating with U.S. Ground troop deployment, as suggested by former President Donald Trump. Johnston warns that if the Strait remains closed, the outcome won’t be a recession, but a “Great Depression” level event. “Really, really, really awful,” she stated in her interview with Wired.

The situation remains fluid, and the potential for escalation is high. The coming weeks will be critical in determining whether diplomatic efforts can de-escalate tensions and prevent a catastrophic disruption to global energy markets.