The biggest energy shock in modern history, fuel shortages “within weeks”, a global recession – economic warnings have become increasingly dire since Iran throttled shipping flows through the Strait of Hormuz in late February.
But ten weeks after the first American-Israeli attacks, stock indices, companies and governments were surprisingly optimistic. With each passing day, the divergence between the eerie silence in the markets and the alarming warnings of an impending supply chain crisis grows.
It is true that some countries have taken significant steps to curb rising fossil fuel prices. Many in Asia, dependent on Gulf oil, are urging citizens to take energy conservation measures – or in some cases even resorting to outright rationing.
But in Europe the reaction has been more muted: motorists are feeling the strain of higher petrol and diesel costs and central banks have warned they could raise interest rates to curb inflation, but broader supply chains appear to be holding up.
Investors seized on any positive news: US stocks in particular were buoyed by the AI boom, even as the conflict raged. European markets were less exuberant – but not crashing.
Stockpiles have cushioned the economic impact on businesses and people around the world, but the stranglehold on Hormuz remains, even as the latest back-and-forth between Donald Trump and Tehran this week renewed hopes of a breakthrough.
The longer the waterway remains closed, the more emergency supplies of oil and other essential goods will be depleted, negatively impacting the entire economy. Even if the canal were to fully reopen tomorrow, it could take months for supply chains to return to normal.
More and more companies have to reckon with the fact that vital inputs will become scarce. Some executives and analysts worry that such reports of disruption and shortages could be just a taste of what’s to come.
‘complacency’
Just over a week after the war began, U.S.-listed automaker Lucid Motors was confident that its plans to make electric vehicles in Saudi Arabia would not be affected. Last week it warned that the conflict had “disrupted the supply of materials critical to our manufacturing processes” and that “significant price increases for our raw materials or components” were expected.
Lucid is doing particularly badly because of its operations in Saudi Arabia, but other automakers are “playing with fire” and hoping the situation resolves itself, an industry executive said, adding: “There is a certain level of complacency. How long this will last is unclear.”
Others are more optimistic. Walter Mertl, chief financial officer of German automaker BMW, said on Wednesday that the Iran war had had only a “limited” impact. “We believe it is temporary and we will find a solution soon,” he told investors.
Shock absorber
Based on the experience of the coronavirus pandemic, which has caused a temporary halt in global trade, companies may be better prepared than they were a decade ago.
Since then, many companies have tried to map different levels of their supply chains. But the question of when shortages will occur is incredibly complicated – to the point that many of the world’s largest companies may still not know where they are most at risk.
“Many companies don’t have good enough supply chain visibility at Tier 3 or Tier 4 levels, and that could lead to complacency,” said a person involved in mapping key mineral dependencies for major manufacturers.
At some point supplies of materials, parts and fuel must run out.
JP Morgan commodities analyst Natasha Kaneva warned in a note last week that oil inventories had acted as a “shock absorber” for the global economy. However, it could reach “operational stress levels” across the OECD group of developed countries as early as next month.
In addition to oil and gas, experts also warn of rising prices and supply shortages of fertilizers, metals like aluminum and several chemicals crucial to modern manufacturing.
Material supply problems could become “really serious” towards the end of May, when shortages of some parts begin and lead to production halts, the automotive industry’s chief executive said. “Nobody has pressed the panic button yet,” but “people are fleeing wherever they can.”
Inflation on the rise
Tim Figures, a trade expert at Boston Consulting Group, said European consumers are likely to face higher prices even if they don’t face outright shortages.
“All of these things are global commodities and as supply decreases, the price increases. So while we are not seeing supply disruptions in Europe in the same way that we might have seen in Asia, we have of course seen price impacts because you have to pay more to secure scarce supplies from elsewhere,” he said.
According to the figures, the decline in some commodities could long outlast the reopening of Hormuz. “For chemicals broadly, it will take months for things to get back to normal, but that is mostly about shipping.
“For metals such as aluminum where there has been infrastructure damage, it will take longer to restore full capacity as this damage will need to be repaired.”
Steve Elliott, chief executive of the Chemical Industries Association, said the British lobby group’s members were not yet reporting product shortages because Asian rivals were hit hardest. But there is a “slow rise” in higher prices for solvents, caustic soda, ammonia, methanol and ethylene – chemicals whose uses range from metal treatment to the production of plastic packaging.
“Ultimately this just leads to inflation,” Elliott said. “If this continues, it will lead to a decline in demand and a recession” for the sector.
Economists stress that the impact of higher prices and potential shortages will be much greater in some countries than others, depending on how heavily they rely on oil and gas imports and how weak their economies were in the run-up to the war.
“The impact will be inflationary across the global economy, but the knock-on effects on growth will vary significantly across countries,” said Dhaval Joshi, chief strategist at consultancy BCA Research. “Right now the U.S. is doing well, so it’s pretty difficult to see a global recession.” However, he added: “Even in the US there are winners and losers: the less affluent consumers are being hurt, while shale is obvious.” [oil and gas] The producers are doing very well.”
Political consequences
Given the uncertainty about possible outcomes, communicating the extent of the looming crisis represents a daunting challenge for politicians wary of encouraging consumers to panic buy.
In the UK, the government’s message focused on placing blame squarely on the Trump administration for starting the conflict without an exit strategy, rather than warning consumers of the consequences to come.
But the Prime Minister’s chief secretary Darren Jones recently suggested the price effects would still be felt eight months from now – while Keir Starmer warned fuel shortages could force holidaymakers to change their summer plans.
Chancellor Rachel Reeves is expected to say more about how she plans to protect some households from rising electricity bills ahead of winter, around the time the next quarterly cap on domestic energy bills is announced at the end of May, due to come into force in July.
Still, governments will not be able to prevent consumers from feeling the effects of war. Neil Shearing, chief economist at consultancy Capital Economics, said that if the strait reopens soon in Europe, “we can expect a period of stagnation this year and then a recovery.” “It will feel pretty bleak, but it won’t be a recession,” he added.
But if the conflict proves to be prolonged, Shearing warns, “we’ll get to the point where things start to become non-linear” – to the point where factories are no longer able to continue operating and there are shortages.
