The funny thing is that we don't need to speculate about many of the effects of this because it's already happened but nobody really paid attention to it. I am talking about the Trump 2020 OPEC deal.

First, some context. OPEC/OPEC+ generally set their production to meet demand and to keep oil prices stable. That means they aim for a floor and ceiling on oil prices. Every 3 months they meet and try and anticipate demand. Produce too much and the price is too low. This hurts revenue. Produce not enough and it creates political instabilities, both locally and abroad. It would in particular hurt security guarantees with the US that go back to FDR and King Faisal making an oil-for-security deal in 1945. Now, that doens't mean OPEC members can't and don't cheat. They can and do. But it is generally successful [1].

In January-February 2020 we had the start of the pandemic. A lot of people weren't paying attention or thought it could be contained. That was over by March 2020 and much of the world went into lockdown. A lot of travel just stopped. This had an immediate effect on the oil market. Nobody was buying. Nobody had places to store excess oil. Russia and Saudi Arabia got into an oil price war. And the futures price briefly went negative [2]. This technically was an extreme contango market [3].

So what did the Trump administration do? Well, in my estimation, they panicked. They feared this would be devastating to US oil producers. So then-president Trump went to MBS and cajoled him into getting OPEC to massively cut oil production [4][5]. How much? Initially by 9.7 million barrels per day and then going down over the next 2 years to 6.3 million. That's roughly 10% of global crude oil output.

When I say "panicked", because of the OPEC meetings every 3 months, this would've happened anyway. OPEC would've cut production. The market would've stabilized. Instead, Trump locked OPEC into a 2 year cut and essentially gave them permission to drive up oil prices. And that's exactly what happened. This deal maps pretty much exactly to the pandemic inflation spike.

And nobody talks about it. Republicans were keen to blame Biden. Democrats chose to blame "greedy" oil companies even though no amount of US production could replace what OPEC had cut. Biden even went to Riyadh to beg MBS to increase production and he refused [6]. And nobody talks about any of it.

That was 10%. The Hormuz closure is 15-20% and also impacts natural gas, helium, fertilizer and a bunch of other things not impacted by the OPEC deal. Oil is being kept at a futures price of ~$100/barrel by record withdrawals from strategic reserves. By early July, those strategic reserves will be empty and there'll be no way to inject oil back into the market other than reopening the Strait. And that will lag weeks because oil container ships move as fast as bicycles.

So think back to the pandemic. Shipping containers 6x'ed. Gas prices went way up. It impacted jet fuel and sea freight. All of that is coming in the next month or two and there's honestly little we can do about it now. If the Strait reopened today, these second and third order effects are already baked in.

This is now a structural repricing event and we're going to see crude oil and gas prices near current levels probably for years.

Oh and oil CEOs are starting to warn about the coming energy shock [7][8] so buckle up.

[1]: https://www.macrotrends.net/1369/crude-oil-price-history-cha...

[2]: https://www.congress.gov/crs_external_products/IN/PDF/IN1135...

[3]: https://www.investopedia.com/terms/c/contango.asp

[4]: https://www.reuters.com/article/economy/special-report-trump...

[5]: https://www.reuters.com/article/world/trump-touts-great-saud...

[6]: https://www.congress.gov/117/meeting/house/114185/documents/...

[7]: https://www.thestreet.com/investing/stocks/chevron-ceo-drops...

[8]: https://finance.yahoo.com/sectors/energy/articles/exxon-warn...

> And that will lag weeks because oil container ships move as fast as bicycles.

IIRC there’s also major long-term supply destruction happening, because wells have to be capped around the Persian Gulf since the tanks are full.

Resuming production is also going to take years. Every bit of oil storage inside the Strait is at maximum capacity. All of the wells have had to stop producing because there is nowhere for the oil to go. When wells stop, it can take a long time to ramp up the production to previous levels -assuming it can ever again resume its prior peak output. Additionally, several key bits of infrastructure (trains, refineries) have been damaged and cannot be easily repaired.