What does the energy gap mean for global growth

After the U.S.-Iran war broke out, the Strait of Hormuz—carrying about one-fifth of the world’s energy shipments—faced an almost complete blockade for the first time in history. Late on April 1, U.S. time, Trump addressed the American public, saying victory in the war was in sight, but that the strikes against Iran would still continue for another 2–3 weeks. At the same time, he did not make clear whether U.S. ground forces would formally enter the war. Although this statement still leaves many questions, the likelihood that the Strait of Hormuz would reopen soon has likely fallen again. As the blockade of the strait drags on, market attention to the war may partially shift to shortages of energy and critical goods, supply-chain disruptions, and the fragility of cash flow among market participants. This article discusses the impact of energy gaps on global growth and the “loss allocation” under three scenarios: the strait reopening relatively quickly (optimistic scenario), the strait being blocked for 3–4 months (neutral scenario), and a blockade lasting longer (risk scenario). Market pricing falls between the optimistic and neutral cases: global growth will be significantly disrupted but will still expand; however, if a long-term blockade of the strait occurs—or if a pessimistic scenario materializes in which Middle East energy infrastructure is hit severely—the probability of a global recession will rise.

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