If a diplomatic breakthrough between the U.S. and Iran permanently reopens the Strait of Hormuz, it will likely lead to a significant drop in oil prices. However, this is unlikely to quickly improve the situation in the petroleum products market, the author of the article argues, citing data on the state of the global energy market.
The fact is that more than two dozen oil refineries in the Persian Gulf were damaged during the conflict, and many of them now require major repairs. Delivery times for critical equipment—including compressors, heat exchangers, and specialized catalysts—had already been extended even before the conflict began, making a rapid recovery virtually impossible.
China’s response to the supply shortfall will play a key role. During the war, the world’s second-largest oil refinery sharply reduced its processing volumes and fuel exports.
The drop in demand may turn out to be deeper than forecast, as consumers and companies cut back on spending due to high electricity prices.
At the same time, the urgent need to replenish—and in some cases expand—global fuel reserves is likely to increase pressure on demand for oil refining, possibly for many years to come.
These factors increase the likelihood of a prolonged period of inflation driven by rising energy prices this winter and in the years to come.
Inflation Risks Are Rising
In July, consumer prices in the U.S. rose by 3.4% compared with the same period last year, mainly due to a 14.7% increase in energy costs, including a sharp 24.6% rise in gasoline prices. In the eurozone, inflation accelerated to 2.9% due to a 10% rise in energy costs, while Japan’s producer price index rose 7.2% in July.
Many Wall Street analysts and economists believe that the spike in energy prices will be temporary and will not lead to a rise in core inflation. However, if the oil crisis turns out to be as severe as current data suggest, this assumption may prove to be incorrect.
This is especially true for Europe and Asia, where liquefied natural gas prices have also risen significantly. The U.S. has not escaped rising energy prices either, and the risks to current year-end forecasts are clearly shifting to the upside.
U.S. President Donald Trump, who has made lowering the cost of living a key priority of his second-term agenda, acknowledged this, warning Americans last week to prepare for rising energy prices.
Nearly half a year after the conflict in Iran began, the world appears to be witnessing a slow but escalating crisis. Fuel reserves in the market are running low as stockpiles have dwindled, and disruptions caused by the war continue to put additional pressure on an already overburdened refining system.
The energy crisis, which is already having tangible consequences for the global economy, is only just beginning.
