The biggest energy shock in modern history, jet fuel shortages “within weeks”, a global recession – since Iran throttled shipping flows through the strait of Hormuz at the end of February the economic warnings have become increasingly dire.
Yet 10 weeks on from the first US-Israeli attacks, share indices, companies and governments have been surprisingly sanguine. Every day the divergence grows between the eerie quiet on markets and alarming warnings of an imminent supply chain crunch.
It is true that some countries have taken significant steps to mitigate soaring fossil fuel prices, with many in Asia that depend on Gulf oil urging citizens to take action to conserve energy – or, in some cases, resorting to outright rationing.
Yet in Europe, the response has been more muted: motorists are feeling the pinch from higher petrol and diesel costs, and central banks have warned they may raise interest rates to constrain inflation, but wider supply chains appear to be holding up.
Investors have seized on every piece of positive news: US shares in particular have been buoyed up by the AI boom, even as the conflict raged. European markets have been less exuberant – but have not crashed.
Stockpiles have cushioned the economic impacts on businesses and people around the world, but the chokehold on Hormuz remains, despite this week’s latest back and forth between Donald Trump and Tehran again raising hopes of a breakthrough.
The longer the waterway remains closed, the more emergency stocks of oil and other vital commodities are run down, with knock-on effects across the economy. Even if the channel were to reopen fully tomorrow it could take months for supply chains to return to normal.
More and more companies are having to acknowledge the possibility that vital inputs will run out. Some executives and analysts fear such reports of disruption and scarcity may be only a foretaste of what is to come.
‘Complacency’
Just over a week into the war, the US-listed carmaker Lucid Motors was confident 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 in our manufacturing processes” and that it faces the prospect of “substantial increases in the prices for our raw materials or components”.
Lucid has it particularly badly because of its Saudi operations, but other carmakers are “playing with fire” by hoping the situation will resolve itself, said one senior executive in the industry, adding: “There’s a degree of complacency. How long it lasts is anyone’s guess.”
Others are more optimistic. Walter Mertl, the finance chief at the German carmaker BMW, said on Wednesday that there had only been a “limited” impact from the Iran war. “We think it’s temporary and we will have a solution soon,” he told investors.
Shock absorbers
Companies may be better prepared than they were a decade ago because of the experience of the coronavirus pandemic, which saw global trade seize up temporarily, before roaring back and causing years of disruption and volatile demand.
Many businesses have since tried to map different tiers of their supply chains. Yet the question of when shortages will hit is incredibly complicated – to the point that many of the world’s largest companies may still be unaware of where they are most exposed.
“A lot of companies don’t have good enough supply chain visibility at the tier-three or tier-four level, and that could be breeding complacency,” said one person who has been involved in mapping dependencies on critical minerals for major manufacturers.
Eventually, stockpiles of materials, parts and fuel have to run out.
JP Morgan commodities analyst Natasha Kaneva warned in a note last week that oil inventories have acted as a “shock absorber” for the global economy. But it could reach “operational stress levels” across the OECD group of industrialised countries as soon as next month.
As well as oil and gas, experts are warning about rising prices and supply constraints for fertiliser, metals such as aluminium, and several chemicals that are crucial to modern manufacturing.
Materials supply problems could get “really hot” around the end of May if shortages start to hit some parts and force production stoppages, said the car industry executive. “Nobody has pressed the panic button yet”, but “people are eking out wherever they can”.
Inflation inbound
Tim Figures, a trade expert at Boston Consulting Group, said European consumers are likely to face higher prices, even if they are not hit by outright shortages.
“Any of these things are global commodities and, as the supply diminishes, the price goes up. So while we’re not seeing interruptions of supply in Europe in the same way as we might have seen in Asia, we have of course seen price impacts, because you’re going to have to pay more to secure scarce supply from somewhere else,” he said.
Figures said the hit to some commodities could long outlast Hormuz reopening. “For chemicals, by and large, it will take months for things to return to normal, but that’s largely about shipping.
“For metals like aluminium, where there’s been infrastructure damage, then that’s going to take longer to get back to full capacity because that damage is going to have to be repaired.”
Steve Elliott, the chief executive of the Chemical Industries Association, said the UK lobby group’s members are not yet reporting shortages of products as Asian rivals have been hardest hit. But there is a “slow burn” of higher prices for solvents, caustic soda, ammonia, methanol and ethylene – chemicals with uses ranging from treating metals to making plastic packaging.
“Ultimately, that only leads to inflation,” said Elliott. “If that persists it leads to destruction of demand and 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 economy was in the run-up to the war.
“The impact will be inflationary across the global economy, but the knock-on effects on growth will differ significantly across countries,” said Dhaval Joshi, the chief strategist at the consultancy BCA research. “At the moment, the US is doing OK so it’s quite hard to see a global recession.” However, he added: “Even in the US there are winners and losers: the less well-off consumers are getting hurt, whereas obviously shale [oil and gas] producers are doing very well out of it.”
Political ramifications
Given the uncertainty about potential outcomes, communicating the scale of the looming crisis is a formidable challenge for politicians, who are wary of spooking consumers into panic-buying.
In the UK, the government’s message has focused on pinning the blame firmly on the Trump administration for starting the conflict without an exit strategy, rather than warning consumers of the consequences to come.
But the chief secretary to the prime minister, Darren Jones, recently suggested the price effects would continue to be felt in eight months’ time – while Keir Starmer has warned jet fuel shortages might force holidaymakers to change their summer plans.
The chancellor, Rachel Reeves, is expected to say more about how she plans to shield some households from rising utility bills before the winter, around the time the next quarterly cap on domestic energy bills is announced in late May – to come into force in July.
Yet governments will not be able to prevent consumers from feeling the effects of the war. Neil Shearing, the chief economist at the consultancy Capital Economics, said that in Europe, if the strait reopens soon, “we’re looking at a period of stagnation through this year, and then a recovery”. “It will feel pretty grim but it won’t be a recession,” he added.
However, if the conflict proves prolonged, Shearing warns, “we’re getting to the stage where things are starting to become non-linear” – the point that factories are unable to continue operating and shortages start.