{"id":556150,"date":"2026-03-31T12:57:11","date_gmt":"2026-03-31T12:57:11","guid":{"rendered":"https:\/\/www.newsbeep.com\/us\/556150\/"},"modified":"2026-03-31T12:57:11","modified_gmt":"2026-03-31T12:57:11","slug":"the-oil-crisis-is-about-to-get-physical","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/us\/556150\/","title":{"rendered":"The Oil Crisis is About to Get Physical"},"content":{"rendered":"

\"A<\/a><\/p>\n

Source: JP Morgan via Marketwatch<\/p>\n

In normal times, about 20 percent of the world\u2019s oil production passes through the Strait of Hormuz. That flow has been cut off except for Iranian oil and a handful of other vessels the Iranians are allowing through. This disruption has led to a large spike in oil futures prices:<\/p>\n

\"\"<\/a><\/p>\n

Source: Trading Economics<\/p>\n

But this price rise has been speculative, driven by the (justified) expectation of future shortages rather than a current lack of oil. In fact, so far deliveries to markets around the world haven\u2019t declined, because shipping oil from the Persian Gulf to major markets takes 4-6 weeks. As a result there was a large quantity of oil already at sea, outside the Strait, when the war began.<\/p>\n

However, this grace period is about to end. The oil crisis is about to get physical. The map at the top of this post shows J.P. Morgan\u2019s estimates of when tankers from the Gulf will stop arriving at various destinations. Deliveries to Asian markets will end this week; deliveries to Europe will end next week.<\/p>\n

And once the crisis gets physical, there will no longer be room for jawboning the markets. Since the war began there have been several occasions on which Donald Trump has been able to talk prices down by asserting that meaningful negotiations are underway with his invisible friends the Iranian regime, but that won\u2019t work once the oil runs out. So prices will have to rise to whatever level destroys enough demand to match it to the available supply.<\/p>\n

PS: The United States buys little oil from the Persian Gulf, but we can expect U.S. oil prices to rise in response to shortages around the world.<\/p>\n

So how high will oil prices get? I\u2019ve written about this before, but I thought it might be useful to update the analysis, emphasizing how uncertain the prospects are and the real risk of extremely high prices.<\/p>\n

There are two big sources of uncertainty. The first is that we don\u2019t know how much oil will manage to escape the Gulf. Right now oil supply is drastically curtailed, but not by the full 20 million barrels of oil a day that used to flow through the Strait of Hormuz. The Saudis have a pipeline that lets them ship some of their oil to the Red Sea; Oman has a pipeline that takes some oil around the Strait. And Iran has been letting millions of barrels of its own oil pass. Whether all these \u201cleakages\u201d will continue depends on the course of the war.<\/p>\n

Second, how high must prices rise to choke off a given amount of demand? We know from previous oil shocks that the price elasticity of demand for crude oil is low \u2014 that is, even large price increases only cause small declines in demand. But in the current crisis it matters just how low that elasticity, a number that is impossible to estimate with any precision, really is.<\/p>\n

So, what is a reasonable range of possibilities? I\u2019ve considered three scenarios for the disruption to oil supply: a \u201clow disruption\u201d scenario in which supply is reduced \u201conly\u201d 8 percent from normal levels, a medium scenario in which supply falls 12 percent, and a high disruption scenario in which it falls 16 percent. I\u2019ve also considered three alternatives for the price elasticity of oil demand: \u201chigh\u201d at 0.2, medium at 0.15, and low at 0.1.<\/p>\n

And I assume that in the absence of this war the Brent price would be $65 a barrel. In that case I get the following matrix:<\/p>\n

\"A<\/a><\/p>\n

Readers should know that Robin Brooks<\/a> has done a conceptually similar analysis. My numbers, however, are more alarming \u2014 and I believe that you should be alarmed.<\/p>\n

In particular, by presenting the analysis this way, I risk conveying the impression that we should assume a moderate, medium\/medium outcome. That is not at all a safe assumption.<\/p>\n

After all, what would it take to get to my \u201chigh disruption\u201d scenario? That\u2019s what might happen if Iranian oil exports are cut off, say by a U.S. attack on Kharg Island, and if supply via pipelines is hindered by Iranian retaliation against other Gulf oil facilities as well as attacks by the Houthis on Red Sea shipping. That is not an outlandish possibility. It is, in fact, exactly what we should expect if the Trump administration follows through on what appear to be its current war plans.<\/p>\n

And if oil really does go to $200 or more, it\u2019s all too easy to envisage a full-blown global economic crisis, with an inflation surge and quite likely a recession.<\/p>\n

Ever since this war began I\u2019ve noticed a sharp divide in sentiment among experts. Finance and macroeconomics experts have been relatively sanguine about our ability to ride out this storm. But talk to or read energy experts \u2014 people who focus on the physical side of the oil crisis \u2014 and their hair is on fire.<\/p>\n

I\u2019m mostly a macroeconomist. But my hair is definitely starting to smolder.<\/p>\n

MUSICAL CODA<\/p>\n

My apologies<\/p><\/p>\n","protected":false},"excerpt":{"rendered":"Source: JP Morgan via Marketwatch In normal times, about 20 percent of the world\u2019s oil production passes through…\n","protected":false},"author":2,"featured_media":556151,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[36],"tags":[28,101],"class_list":["post-556150","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy","tag-business","tag-economy"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts\/556150","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/comments?post=556150"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts\/556150\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/media\/556151"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/media?parent=556150"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/categories?post=556150"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/tags?post=556150"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}