The oil crisis is here, and we are only just beginning to feel its impact.

As the Middle East conflict between Israel and Iran continues to unfold in a stalemate, its impact on the global economy remains uncertain. The core issue is oil. Iran has closed the Strait of Hormuz, cutting off nearly 20% of the world’s oil supply. Although fuel prices have surged sharply, a long-term closure of the Strait could lead to more destructive, comprehensive consequences.

To understand the current situation and future developments, Harvard Business Review spoke with oil analyst Rory Johnston, founder of the newsletter Commodity Context, which analyzes energy industry data, and a lecturer at the University of Toronto’s Munk School of Global Affairs and Public Policy. We had this conversation on Tuesday, March 17, in the morning.

HBR: The war has entered its third week, and Iran’s blockade of the Strait of Hormuz is essentially shutting down a pipeline that supplies about 20% of global oil. How much oil has already exited the market? Even if the situation is resolved tomorrow, what will be the impact?

Johnston: There are two aspects to consider. First is production. We see production declining across the region because, once the Strait of Hormuz is lost, countries like Iraq and Kuwait have nowhere to store their crude oil and are forced to shut down production—temporarily halting oil wells. I estimate that the total supply shut in the Gulf region is about 8.5 million barrels per day, which accounts for 8% or more of global supply. That’s a huge volume of crude oil. Even if the Strait reopens today, restoring production and exports could take weeks or even a month or two.

Second is supply: roughly 20 million barrels of oil per day are effectively blocked from leaving the Strait and cannot reach the global market. Over 15 days at 20 million barrels per day, that’s about 300 million barrels of oil that haven’t been exported from the Gulf.

It’s like a sudden transportation vacuum in the normal flow pipeline of oil from the Gulf region (mainly heading to Asia).

Now, an important point about the global oil system is that it’s fundamentally a dynamic chemical reaction system. It needs to maintain a stable flow rate; any major change in flow can trigger chaos throughout the system. This transportation vacuum is critical because the tankers that left the Gulf three weeks ago are still en route, expected to take another week or two to reach their destination ports. Once this in-transit inventory is exhausted, the real supply disruption will begin to hit regional markets hard. At that point, we’ll be forced into a rapid inventory depletion cycle.

Asian refineries have taken precautionary measures. For them, halting operations is complex and costly, potentially taking weeks or even a month. So they’ve preemptively reduced operating rates to extend the time they can maintain production with limited feedstock. This gives us a glimpse of what might happen in one or two weeks when the shockwave from the transportation vacuum hits. In fact, some effects are already visible: for example, Asian jet fuel prices are now over $200 per barrel equivalent. Heavier fuel oils used to power global shipping, which are usually cheaper than crude, are now trading above crude oil prices.

HBR: If the deadlock persists, could we see a domino effect leading to escalating crises? For example, if raw material supplies are completely exhausted, refineries might be forced to shut down entirely. In your view, what are the key “dominoes” that could fall? When might they start collapsing?

Johnston: The first domino to fall will be the moment the transportation vacuum finally reaches end markets and triggers a price shock. After that, I believe the next big domino will be market reactions—because once physical shortages start rapidly depleting inventories, we can’t avoid facing reality. Financial markets, especially derivatives trading in futures markets, still seem somewhat in denial. There’s a deeply ingrained belief that even if the war continues, Trump will end it at any moment.

Looking at Trump’s foreign policy style—particularly in military interventions—he tends to take grand, attention-grabbing, somewhat theatrical actions, then quickly declare victory, ending things in a day or two. Honestly, that was my initial expectation. I didn’t think this war would enter its third week, or that the actual disruption of traffic through the Strait of Hormuz would last this long. I never imagined I’d see such a situation in my lifetime.

There’s a lot of alarmism in the oil market. I consider myself a cautious analyst. I usually talk about how resilient this system is, how strong its capacity to adapt to shocks. But this time, the impact is so severe that I worry it might break the system rather than just bend it. Many non-professional observers are reluctant to accept this because, frankly, people in the oil industry always say everything is a survival threat. Now, we’re somewhat in the “boy who cried wolf” situation.

HBR: What exactly do you mean by “break the system”?

Johnston: In this context, “breaking” essentially means demand destruction. Usually, rising prices incentivize suppliers to adjust logistics and trade routes, increasing supply even if underlying production remains unchanged. But for the losses we’re facing now, these measures are insufficient. If we continue down this path, prices will need to rise to a level that physically and quantitatively forces demand to decrease.

This pattern differs from what we typically see in crises. Usually, prices stay high for a long time, gradually eroding consumers’ ability to spend, eventually causing a conventional recession. But the current mechanism is fundamentally different—it’s not demand destruction through price elasticity (where consumers buy less because prices are too high), but rather income elasticity demand destruction (where consumers can’t buy because their purchasing power has collapsed). It’s not “oil is too expensive, so I don’t commute by car,” but “I’m unemployed, so I can’t buy a car to commute.” The latter is a more pervasive form of demand destruction.

In this scenario, if the Strait remains closed, prices will keep rising, rising, and rising—until fewer planes are in the air and fewer cars on the road. I believe this is the situation we’re facing now.

HBR: In the U.S., people have been focused on rising gasoline prices. But I’m curious—what other consequences might the oil crisis bring? How will it affect other commodities?

Johnston: Before discussing other commodities, let’s talk about fuels. Markets for diesel, heating oil, and jet fuel—what we call middle distillates—are under far greater stress than gasoline markets. Since the Russia-Ukraine conflict in 2022, these markets have been extremely tight. They’ve been the main source of tension in the oil products market ever since. For example, during last year’s “Twelve Days of War,” crude oil prices surged, but diesel prices surged even more. The crack spread (the premium of diesel over crude) was about $30 per barrel in early February, now approaching $70.

Gasoline affects household budgets and is politically sensitive. But middle distillates are actually much more important for the economy because they influence transportation costs, freight, everyday groceries, Amazon deliveries, airline tickets, and more. So I see this as a fuel that’s much more critical economically and structurally, especially when considering potential inflation pressures.

HBR: Considering the delayed effects of these price increases, how quickly do you think they will show up in higher transportation costs and consumer prices?

Johnston: Right now, people aren’t viewing this as a sustained shock. Many say, “I’ll bear it for now.” But I think if this situation persists for one or two months, downstream supply chains will be forced to pass on costs. In the first month, I expect the main impact to be on things like reduced shipping margins. By the second or third month, companies will try to recover profits by raising prices for customers. So I expect these effects to really start to show in about three months.

If these prices stay high, and if, say, the Federal Reserve is very aware that prices remain elevated, you can anticipate the future trend, right? In the U.S., they might not raise interest rates, but they probably won’t cut them either.

HBR: The Fed has been raising rates slowly after the Russia-Ukraine conflict, and some feel they missed the opportunity to act against inflation.

Johnston: The experience of 2022 illustrates this well. Usually, central banks ignore fluctuations in energy and food prices because they don’t truly reflect underlying inflation pressures they’re trying to control. But in 2022, inflation kept rising, and then there were price shocks. People started to worry that the Fed could no longer ignore gasoline prices because that might disrupt inflation expectations, like in the 1970s.

Most people don’t know the daily price of copper or wheat, but everyone sees the gasoline price signs on their commute. So even if everything else only rises 2%, a 25% increase in gasoline makes it feel like everything is up by 25%. That’s terrifying for the Fed because it echoes the classic explanation from the 1970s: inflation expectations spiral out of control, forcing Volcker to tighten aggressively, leading to a painful recession to re-stabilize expectations.

In 2022, we didn’t see inflation expectations spiral out of control. Not yet. But it’s the worst nightmare for central bankers.

HBR: How much relevance do you think 2022’s experience has? What are the similarities and differences?

Johnston: The main similarity is panic, but most fundamentals are very different. Going into 2022, we had a very tight oil market. OPEC cut a lot of production in 2020 during the pandemic, which I think was the right move at the time because it prevented an even worse boom-bust cycle. But as demand plummeted, we saw massive supply losses. Fortunately, demand and the global economy recovered much faster than expected, but we didn’t have enough supply to keep up. Inventories kept depleting, and even before the Russia-Ukraine conflict, prices had already returned to triple digits.

Then the conflict started. The biggest panic then was the IEA’s April report, which said that Western import bans and restrictions would cut Russian supply by 3 million barrels per day. I remember thinking, “That’s an insane loss.” But in the end, we only lost about 1 million barrels per day, and supply mostly recovered.

Now, before the crisis, the market was quite loose. We’re actually facing a surplus of 2 to 3 million barrels per day. OPEC has increased production significantly. Global demand is decent but not stellar. Overall, inventories seem to be rising, which will put downward pressure on prices. The key difference is that last year, we didn’t see prices fall as much because of aggressive sanctions on Venezuela, Iran, and Russia.

The fundamental difference now is that, back then, we worried about losing 3 million barrels per day due to the Russia-Ukraine conflict. Today, the closure of the Strait of Hormuz has caused a literal cliff of 20 million barrels per day. We’re talking about a sevenfold increase in supply loss.

HBR: So, the scale of this crisis is entirely different.

Johnston: There’s a sense of optimism in the market now, thinking “They’ll fix this again.” The system is trying to reroute. Saudi Arabia has a pipeline running east-west that could theoretically deliver 5 million barrels from the Gulf to the Red Sea, though we haven’t seen that confirmed yet. The Houthis might become a problem again, as they were a few years ago. But that’s the biggest offset. Then there’s the flow of sanctioned oil from Russia and Venezuela.

Currently, Russia is the biggest beneficiary of this war. India has been buying Russian oil aggressively. Everyone is snapping up Russian oil, to the point that Eastern Europe is asking Brussels, “Can we relax some restrictions on Russian oil imports?” The IEA announced a large release of strategic reserves: about 400 million barrels over roughly 120 days. That’s about 3.3 million barrels flowing back into the system daily—an astonishing figure if it had happened in 2022.

HBR: What impact does this have on middle-income countries? And how will it affect the global economy? Clearly, Europe and the U.S. absorb high oil prices differently than countries like India or Vietnam.

Johnston: That’s very important because, although we can talk about how markets will resolve this, there’s also a human factor—people will have to endure shortages. There isn’t enough supply to meet demand. Some will have to cut consumption. The question is: who?

Markets will resolve this through price mechanisms: those most sensitive to price—meaning the world’s poorest—will have to reduce demand. For North Americans, Europeans, and wealthy Asians, this will be a painful price shock. We’ll worry about recession, everyone will complain, and it will be politically unpopular. But ultimately, we might not see actual shortages because we have the capacity to import on our coasts.

In developing countries and the Global South, even if some can pay those prices, ordinary consumers cannot. They won’t be able to import enough, and they will face real material shortages.

We saw a bit of this during the 2022 European natural gas crisis. A famous example: a liquefied natural gas (LNG) ship contracted to Pakistan tore up its contract and headed to Europe. Sure, there are penalties, but compared to the arbitrage opportunity between Pakistan and Europe, it’s trivial. That’s how markets work: ships go to the highest-paying destinations.

Some might say, “Well, that’s how markets should operate.” But the other side is, Pakistan is left without natural gas, which is critical for power generation, heating, and essential needs. That’s not good.

As the situation develops, those willing to pay the highest prices will still get fuel. As long as global trade remains free, wealthy economies will access oil at very high prices, while the Global South will have to endure shortages.

HBR: What can companies do to avoid the impending shocks? Or are they just at the mercy of markets and geopolitics?

Johnston: If your company is a fuel buyer, one thing is obvious: the market has not fully priced in the “long-term supply disruption” scenario. You can buy forward cargoes at prices well below spot because panic buying is still concentrated in immediate/spot supplies. I admit I misjudged this myself, thinking the crisis would quickly subside—I was wrong.

If this continues, conditions will worsen, prices will rise further, and you’ll have fewer opportunities to hedge at such low prices. So there’s an opportunity now. The challenge is the dual risk—many people hesitate because of it. Last Monday, the market surged over the weekend, with Brent crude approaching $120 per barrel, then falling back to around $85. The daily volatility was about $35. If a company tries to hedge amid such wild swings, it might lock in some upside risk but also face huge liabilities—possibly suffering large losses if it hedges in the wrong direction. If the White House decides tomorrow to end the war and traffic resumes, prices could plummet rapidly.

We’re in a highly uncertain moment because much depends on specific policy decisions—essentially, individual choices. Even if Trump ends the war tomorrow, how will Israel respond? What about Iran afterward?

There’s a saying I like: “Risk is the oil that lubricates the gears of global markets, but uncertainty can make the gears stop turning.” We’re in that moment now—the gears are slowing because people just say, “I don’t know when this will end.” A good example: ships trapped in the Gulf can pay sky-high war insurance to leave, or wait a day or two and leave without extra cost. All of this depends on market expectations of how long this will last.

The more the market expects this to be a short-term event, the less other parts of the market and economy prepare for the long term. That’s the dilemma we’re in.

It’s a completely unsustainable situation. I believe the current market is just waiting, watching for the reality of supply shortages to force action. Because once that happens, even if the White House deploys all its verbal interventions, it won’t offset the hard constraints of 10 million barrels of daily consumption in Asia. The market will have to face and digest the reality of “physical shortages”—and that’s the critical point we’re waiting for.