The memory of oil markets is peculiar. Only the parts they want to remember are retained. It’s difficult to avoid feeling as though we’ve seen this image before, albeit in a different frame, as we sit through the cacophony of the last few weeks, watching tankers reroute around the Cape of Good Hope and refinery managers in Asia making frantic calls for any barrel that isn’t stuck behind a closed strait. The Gulf War in 1990, the embargo in 1973, the Iran-Iraq tanker war, and the Russian rupture in 2022. They all came with the same script and imparted the same lesson—the one that the industry consistently forgets in between crises.
The current situation in the Strait of Hormuz is not a novel form of catastrophe. It’s a scaled-up version of an old one. Pulling that volume out of circulation for months at a time is what economists used to model as a tail risk. Normally, nearly a fifth of the world’s oil flows through that tiny sliver of water. It’s only Tuesday now. These are concrete facts: South Koreans staying at home and purchasing paperbacks rather than filling tanks, Lufthansa reducing 20,000 summer flights, and Filipino gas stations padlocking their pumps. They are the sound of demand as they stealthily leave the room.
But before anyone calls the bottom, there is a lesson to be learned from the 1970s. The West did not simply grit its teeth and wait when oil prices quadrupled between 1970 and 1980. It was rebuilt. The fact that American cars went from 13.5 to 27.5 miles per gallon in just ten years may seem unremarkable, but it actually permanently capped a generation of demand. According to the majority of reliable accounts, the world’s per capita oil consumption never reached its pre-shock peak. Eventually, the barrel became less expensive. The desire for it did not return.
The current group of bullish traders appears to be underweighting that portion. Speaking with professionals who keep an eye on this market, it seems like everyone is still pricing the disruption rather than the reaction. Yes, refineries are actively bidding for the remaining crude. Northern Europe has exorbitant prices. Beneath the hysteria, however, a more subdued activity is taking place: order books for electric vehicles in China and Europe are reportedly getting thicker, and policy discussions that had been put on hold for years are now back on cabinet agendas.
It’s dramatic, but perhaps not incorrect, that Juan Cole recently referred to it as the Ragnarök of petroleum. When supply returned, previous shocks ended. When demand decides it’s had enough, this one may come to an end. The structural harm to oil’s long-term narrative would still be there, waiting, if the Strait were to reopen tomorrow.
You get the impression that the industry’s tried-and-true strategy—wait it out, pump more, win back share—is being applied in a setting where half of the audience has already departed. In the short term, the U.S. shale patch will gain. Russia will locate purchasers. Saudi Arabia will grit its teeth and smile. However, Cole stated that the electric car is the only clear winner. The market has previously existed. It simply hasn’t existed with this exit open.