The global oil crisis that wasn’t.

Closing the Strait of Hormuz was supposed to cripple economies worldwide. It didn’t. Why?

In October 1973, Arab nations in the Middle East imposed an embargo on oil exports, targeting western nations that had supported Israel in that year’s Yom Kippur war.

It was a disaster for the global economy. The price of oil quadrupled and shortages produced long queues of cars outside the petrol stations of the world. Barely any country, from the US to the Soviet Union, escaped economic injury. For the next 20 years prices were fairly stable – but then the boom in world commodities sent prices skywards until the Global Financial Crisis blew everything up. After that, and despite volatility, prices went sideways as demand for oil weakened and a glut slowly developed.

Despite the rise of renewables, oil remains by far the world’s most important energy source. There are alternatives, but those will take many years to overtake oil and other fossil fuels.

In February 2026, Donald Trump started a war against Iran without, apparently, understanding that it would close the Strait of Hormuz linking the Persian Gulf with the rest of the world and blocking a quarter of the world’s seaborne oil supplies. For a short time, prices shot up, from around $US65 a barrel in February to a peak of $US113 in March.

But the panic didn’t last. This “crisis” was quite unlike the ones in the 1970s or even the GFC two decades ago. Even though the Strait of Hormuz remained closed to all but a trickle of traffic, the oil price fell again. This time, the world can cope.

Wars have the effect on oil prices that they always have, but the spike which accompanied  the second stage of Putin’s Ukraine adventure in 2022 soon began to wane. Since these figures were reported, the jump caused by Trump’s Iranian escapade has, at the time of writing, almost disappeared.

There are three basic reasons why oil crises are harder to come by these days: supply chains can be more readily shuffled around the globe; oil is being used more efficiently; and cheaper, cleaner alternatives have emerged.

The supply shift

The International Energy Agency’s regular oil market report shows how quickly adjustments were made.

“With Hormuz tanker traffic still restricted,” the report said, “cumulative supply losses from Gulf producers already exceed 1 billion barrels with more than 14 mb/d of oil now shut in, an unprecedented supply shock. The current supply-demand gap is significantly smaller, however, as the market was already in surplus heading into the crisis while producers and consumers alike are responding to market signals …

“On the supply side, Saudi Arabia and the UAE have successfully redirected some exports to terminals loading outside of the Strait. At the same time, stocks from commercial and government strategic storage sites in consuming countries are flowing into markets to offset part of the losses.”

Though oil reserves were tapped and quickly declined, demand has also sharply fallen. Refineries have scaled back and end-users are cutting their consumption, putting downward pressure on prices.

“Aviation activity is also running well below normal levels, helping to ease some of the pressure on jet fuel prices, which nearly tripled after Middle Eastern exports were cut off,” the agency said. “Higher prices, a deteriorating economic environment and demand-saving measures will further weigh on global oil consumption.”

Efficiency

For decades, and particularly since global warming became a major issue, manufacturers and consumers have improved the efficiency with which oil is used, getting more energy out of less oil.

There’s a measure for this: energy intensity. It’s the ratio between energy input and economic output.

In the century’s first two decades, efficiency improvements in the IEA’s 32 member states saved around 24% of energy use. That’s as much as the whole energy consumption of India. Greater efficiency in industry and services accounted for 58% of those savings, energy-saving buildings 23% and more efficient transport 19%.

Improvement in efficiency have massively reduced consumption from what it would have been otherwise. In most developed countries, each person used substantially less in 2024 than in 1970: in Denmark, there was a fall of almost two-thirds. In China and India, industrialisation and getting hundreds of millions of people out of poverty has inevitably increased energy use.

Industrial development in emerging economies has come at a cost. Over the past 55 years, world fossil fuel consumption – oil, coal and gas – followed two rough plateaus. The current plateau, starting at the turn of the new century, is 12% higher than the last.

Cleaner alternatives

The decline in fossil fuel use is almost solely confined to coal, and the change is most clearly see in electricity generation. Britain has shut its coal-fired power stations, replacing the shortfall with renewables. Oil and gas are largely unchanged.

The United States has significantly decreased its use of oil – in most cases, diesel – but the volumes are so low that it doesn’t make much difference. Coal has been replaced by gas. Renewables have along way to go.

Australia is one of the world’s biggest producers and consumers of coal. But the decline in coal as a source of energy has mostly been replaced by renewables rather than gas. Diesel is so expensive that its use in electricity generation is relatively price-inelastic: it’s always so expensive that you don’t use it for this purpose unless you have to.

Electric vehicles are the greatest threat to the use of oil in transport, but they will take many years to replace existing fleets. Even now, only about a quarter of global new car sales are for battery or hybrid vehicles. An existing petrol or diesel vehicle represents a large capital investment with, in most cases, a long life still ahead of it.

Most fuel is consumed by cars and trucks. This forecast from Bloomberg researchers may or may not be accurate; but even if it is, half of all these vehicle types will still be run on petrol or diesel.

A longer-term forecast, from the International Energy Agency, predicts major changes in car fleets but much slower declines in trucks. Any change in aviation or shipping will depend on technologies that do not yet exist – and may never exist.

Chinese manufacturers dominate the international market for electric cars. There are some 50 brands, many of which are losing money: under this stiff competition, and despite subsidies being rolled back, prices are low. A BBC report quoted one customer in China saying: "I drive an electric vehicle because I am poor." It’s a common refrain.

The cost of petrol is a significant factor in the take-up of electric vehicles. The price factor has gained even more momentum following the wars in Ukraine and the Middle East.

But governments are at least as much to blame for high petrol prices as the war in the Middle East. A plethora of national and state charges complicates the situation, but in most western countries, at least half the cost to consumers goes in tax.

There’s a problem here for government budgets. It’s easy to slap a tax on petrol and diesel but much harder to do so with electricity. Drivers of petrol cars pay; EV drivers don’t.

In the end, the battle will be won by the technology providing the best value for the consumer’s money. Battery technology is still in its infancy and, in time, the current lithium-ion batteries will be replaced. Sodium ion is the next big thing: much cheaper and much less reliant on rare earths, which are so dominated by China. Right now, Chinese manufacturers account for 95% of existing sodium battery production but that may not last.

As with many new technologies, many shake-out events are ahead that could render existing factories and supply chains obsolescent. Lithium ion will be the first to go. Big bets on capital investment are being made and not all of them will pay off.

But even now, any significant long-term decline in oil demand has the potential of upending that entire market. When demand falls below supply, prices fall. That will push marginally profitable suppliers out of business: in this case, shale oil and ethanol producers are most vulnerable, as are refineries with low profit margins. In this case, lower fuel prices may not encourage drivers to buy more petrol or to buy more petrol-driven cars. Fleet owners, particularly, look at overall costs for the life of a vehicle; and even if petrol prices fall enough to compete with electricity, maintenance costs and capital outlay may tip the balance against oil.

This may not be the best time to buy shares in an oil company.