The markets are definitely underestimating the impact of the Strait of Hormuz closure. I've heard a couple of different theories why, but the best one seems to be that too many traders were burned by overestimating the impact of COVID on the markets, and so now they're overcompensating by underestimating the impact of the energy sector's worst nightmare. And I don't think the markets are going to properly react to the situation until everything goes absolutely haywire.

The closure of the strait has cut off 10-20% of global crude oil supply. We're at the point in the shutdown where all of the transit before the closure has arrived, which means the effect of the supply shock is now that refineries are draining all of their inventories. That means that 10-20% of demand for refined petroleum products will have to pretty sharpish be destroyed. And while people are definitely prepared to understand the impact on things like gasoline for cars or jet fuel for planes, the reality will also include scenarios like "sorry, can't buy milk anymore because no more plastic for milk jugs." COVID-induced supply shortages broke many people; the coming oil-starved supply shortages are probably going to be at least as bad.

And the real kicker is that, even if you wave a magic wand and reopened the Strait of Hormuz tomorrow, mothballed wells and refineries will take many months to spin back up to full production, just from mothballing. And some of them have been struck as military targets, which will take years to get back to full capacity. I think around 10% of world total LNG capacity is offline until 2027 if not 2028 for that reason alone.

I don't think so.

About 20% of the crude oil and natural gas used to come via the Strait of Hormuz. That's out now, and some oil drills will need to be shut down, and it will take 3 months to 2 years to restart them.

But about half of that could be redirected via some pipelines in Saudi Arabia and the UAE.

So, only about 10% of the oil supply is missing.

But was the entire supply in the rest of the world completely without any slack? Everything was running at capacity, with zero capacity to increase deliveries? I doubt that. Let's split the 10% supply reduction into 5% that the rest of the world can provide, incentivized by the higher prices, and 5% demand destruction, incentivized by the same higher prices.

The rule of thumb in the oil markets is that a 1% reduction in supply results in a 10% increase in price. So a 5% reduction in supply should result in a 50% increase in price. We are there, actually a bit higher. Brent was trading at about $65 until February 2026, and now it's at $120. That's more than 80% higher. All these numbers have high uncertainly bars, of course, but so far it looks to me that the market is not reacting in a patently irrational way to the events.

I’m going to bookmark this and check back periodically this year to see if I am truly not able to buy milk due to plastic. Interesting prediction.

> no more plastic for milk jugs

aiui most plastics in the US for this comes from the ethylene byproducts of natural gas/fracking.

Although it would be unironically fantastic if we could hard wean ourselves off plastics and go back to reusable glass jugs. If I could bring my growler to Kroger for milk and cream I'd be a happy camper

*For the rest of the world.

The cruel irony here is that this really won't affect the US at all. Europe and Asia will feel the brunt of it, and they seem completely uninterested in working toward a solution.

price shocks don't cause inflation, printing money does.