The Strait of Hormuz is becoming the key test of strength between the US and Iran. I've been thinking about what happens if they stay closed for an extended period. My conclusions might surprise you.
Always interesting to get your take on events and their impacts. Hoping there is a silver lining in that it will help accelerate transition thinking into action. a literal burning platform for change.
Insightful as always Micheal. This is a strong distinction: Hormuz is an existential chokepoint for oil, but for gas it is mainly a chokepoint for LNG trade, not for the entire global gas system. The only caveat I’d add is that even a relatively small loss in global gas terms can still create an outsized shock in marginal LNG pricing, because the market clears at the cargo margin, not on annual averages. So I’d frame the asymmetry as: oil suffers more as a physical supply shock, gas more as a pricing and reallocation shock.
I've used your numbers and thought a little further. (hopefully right).
3% of global gas supply are good for 600TWhel, so 100% of global gas supply could deliver ~20000TWhel. Since gas was used to produce 6500TWhel globally, roughly two thirds were used for different purposes, eg industrial heating.
So, all things equal, we could expect a third of the above 600TWhel, ie 200TWhel, to be replaced by wind and solar – in an amazing 3 months. However, two thirds would still be missed.
And that could lead to a much bigger problem. If orange man decides to cut LNG exports in order to calm his home market as well as counter the affordability crisis AND in parallel stops selling Patriot/THAAD interceptors to Europe (for Ukraine), he hands Russia a double-edged sword. The worst scenario would be Europe sacrificing Ukraine on the altar of its own failed energy supply strategy, trading Russian LNG for Ukraine support.
Let’s hope for a much better outcome.
PS Oil price spikes usually don’t lead to an increase in core inflation. They tend to lead to a broad decrease in demand (perhaps recession), since energy demand is mostly inelastic. That’s even worse an outcome than a FED rate hike with little impact on medium/long term interest rates.
No, if 20% of LNG supply suddenly disappears and you have to reduce demand, you don't have to find reductions across all gas sectors proportional to their use. You find it all in whichever sector or sectors has the highest elasticity, and the in case of gas what I am saying is that is likely to be in the power sector, due to the ease of ramping installations of wind and solar.
The distinct impact on individual countries shows how much geopolitics is dominated by proximity to energy resources, and how countries & states respond to their energy demands.
The asymmetry you identify between oil and gas substitution timelines is the most underreported angle on this crisis. The Iran Shock posts I've seen treat them as equivalent supply risks — they're not. What's striking from a European policy perspective is that this asymmetry was already visible before the Strait closed: negative electricity prices and curtailment in markets like Germany and Poland were already signaling that gas-fired generation was losing its price anchor to wind and solar faster than policy frameworks anticipated. The crisis accelerates a process that was already underway. I wrote about the European policy dimension here: https://groundtruthenergy.substack.com/p/the-iran-shock-wont-save-european
The thing about EV proliferation is that its expansion is seen in the west as a decade long process. China is making the switch from internal combustion to EV at a staggering pace and I bet this will accelerate with incentives to get rid of cars with an engine. The US is a lost cause at the moment but the rest if the world is interesting. Australia for example has -35 days of gasoline and diesel reserves. After that the country grinds to a halt. China has the capacity to allow rapid shift to EV. It has a “problem” with over capacity of production. My Chinese EV is superb and I’m done with oil. The EV transition might finally get us off oil much faster than you think possible.
What you're missing is that even the most rapid switch to EVs still has to roll through to the fleet. Car lifetimes are just under 20 years, so even if 100% vehicle sales were EVs tomorrow, it would take 5 years to reduce their oil demand by 20%. And that doesn't count petrochemical use of oil, or shipping and aviation.
I think high gas prices can change that dynamic in less than 20 years. For example, I own one EV and one gas car. When gas spikes I can choose to put most of my miles on the EV to save money. If gas goes high enough the yearly cost differential of ICE vs. EV makes those older gas cars more expensive to run than replacing with a used EV (even a new EV if we eventually get the kind of EV prices China can manufacture at - Hyundai is close now). In 2025 Americans spent an average of $2,500/year on gas, and EVs typically cost only 1/3 to 1/4 of gas to fuel. Plus with with 90% fewer moving parts and no oil, belts, fluid changes, EVs are much cheaper to maintain. Older gas cars get pretty costly pretty quickly (I learned this as a graduate student after I bought a "cheap" 12 yr old Audi for $2,800 and had to sink another $7,500 into maintaining it over the next year!). So the EV annual savings can get significant enough to retire ICE cars early, just like it's cheaper to build a new solar plant than to just maintain an existing coal plant. Similarly, our house is actually set up with both a propane boiler and minisplits/heat pumps that let us choose to heat with gas or solar electric whenever we want outside the colder days in winter, so we can adapt to fuel spikes pretty quickly.
Watch China. The next step is to take cars with an engine off the road. There are now 2 reasons for rapid switch : 1) climate emergency with expanding costs; 2) risk of oil crises. The US is not going to lead this. The world is bigger than the US market.
Please read my post: you're doing "feels", I'm doing numbers. It takes nearly two decades for cars to cycle out of the fleet. Nothing China can do will reduce oil demand by 20m barrels this side of 2040.
That’s true, but forcing internal combustion engines off the road prematurely triggers MASSSIVE transition costs. Scrapping functional vehicles effectively turns them into stranded assets.
The thing about a car with an engine is that it is a forever pollution machine. And it has so many parts to go wrong. Charging my BEV from my solar means true emissions free motoring.
China ‘gets’ the cost of emissions. I think we are approaching the time when reducing emissions will be a huge cost saving.
"The inflation risk facing the UK comes from supply shocks driven by war, energy disruption and broken supply chains. Higher interest rates cannot produce more oil, reopen trade routes or repair supply chains.
What they can do is damage the rest of the economy."
One underappreciated angle: Hormuz is the first real stress-test of whether Western markets can price geopolitical tail risk correctly. So far, the answer is no — markets keep defaulting to a resolution-soon base case, which means every escalation creates outsized moves. The question for energy markets isn't just supply disruption — it's whether the pricing mechanism itself can handle a crisis that doesn't follow a Western timeline.
Excellent article. With focus, I expect we could cut oil usage by 3-7% per year and keep that pace at least for a decade.
It isn't an immediate relief, but more of a long-term geostrategic movement. If we had taken more action during the first "hit" in 2022, the damage would have been reduced already.
We don't know the future, but EVs are a zero-regret strategy to lessen the impact of further oil price spikes.
It troubles me in many ways to say it, but this might be the most positively impactful thing to happen mankind in recent history. A fuel & energy crisis driving electrification and local energy security action. Is there no other proven way to drive a significant move towards carbon reduction?
Thought provoking. You state that 'gas is fungible,' which is true. However, LNG is relatively expensive to transport and has bottlenecks (for liquefaction and for gasification). The price of oil is dictated by global supply, but - correct me if I'm wrong - the gas markets have persistent regional price differences. Those markets that are heavily reliant on seaborne LNG will be impacted by a much higher amount, whereas those getting it piped won't be affected much at all (yes, of course if the price for the seaborne LNG goes up, more of that gas will be liquified and sold abroad, but it won't have the same impact as it would for oil). Let me know if I'm made any mistakes in my reasoning.
The oil-gas asymmetry holds on paper, but the assumption that lost Qatari LNG volumes get absorbed by wind and solar additions inside nine months ignores the baseload gap those cargoes fill in Southeast Asian grids — grids that don't have the interconnection or storage to ride intermittency. The substitution math works for Northwest Europe, maybe. For Pakistan, Bangladesh, Thailand? Those molecules have no replacement on any timeline that matters. The real question is whether prolonged Hormuz closure accelerates coal burn in Asia faster than it accelerates renewables in the OECD — and I suspect the answer is uncomfortable for the transition narrative.
The 9-month gas substitution math is elegant on paper, but it assumes a degree of grid flexibility and interconnection that doesn't exist in the markets most exposed to LNG loss — South Asia, Southeast Asia, parts of the Middle East itself. Bangladesh isn't adding 600 TWh of wind overnight. Pakistan's grid can barely handle what's already connected. The substitution thesis works for Europe and Northeast Asia, where infrastructure and capital are available. For the rest, the gap between losing Qatari LNG and building replacement capacity isn't 9 months — it's years. And those are the markets where the social and political consequences of power shortages hit first and hardest. The energy transition argument is sound directionally, but the timeline assumes a world that's more wired than it actually is.
Always interesting to get your take on events and their impacts. Hoping there is a silver lining in that it will help accelerate transition thinking into action. a literal burning platform for change.
Insightful as always Micheal. This is a strong distinction: Hormuz is an existential chokepoint for oil, but for gas it is mainly a chokepoint for LNG trade, not for the entire global gas system. The only caveat I’d add is that even a relatively small loss in global gas terms can still create an outsized shock in marginal LNG pricing, because the market clears at the cargo margin, not on annual averages. So I’d frame the asymmetry as: oil suffers more as a physical supply shock, gas more as a pricing and reallocation shock.
I wouldn't claim to be able to trade the short-term shocks. My points are longer-term.
Thank you!
Thanks for all your great work!
I've used your numbers and thought a little further. (hopefully right).
3% of global gas supply are good for 600TWhel, so 100% of global gas supply could deliver ~20000TWhel. Since gas was used to produce 6500TWhel globally, roughly two thirds were used for different purposes, eg industrial heating.
So, all things equal, we could expect a third of the above 600TWhel, ie 200TWhel, to be replaced by wind and solar – in an amazing 3 months. However, two thirds would still be missed.
And that could lead to a much bigger problem. If orange man decides to cut LNG exports in order to calm his home market as well as counter the affordability crisis AND in parallel stops selling Patriot/THAAD interceptors to Europe (for Ukraine), he hands Russia a double-edged sword. The worst scenario would be Europe sacrificing Ukraine on the altar of its own failed energy supply strategy, trading Russian LNG for Ukraine support.
Let’s hope for a much better outcome.
PS Oil price spikes usually don’t lead to an increase in core inflation. They tend to lead to a broad decrease in demand (perhaps recession), since energy demand is mostly inelastic. That’s even worse an outcome than a FED rate hike with little impact on medium/long term interest rates.
No, if 20% of LNG supply suddenly disappears and you have to reduce demand, you don't have to find reductions across all gas sectors proportional to their use. You find it all in whichever sector or sectors has the highest elasticity, and the in case of gas what I am saying is that is likely to be in the power sector, due to the ease of ramping installations of wind and solar.
Should have read the whole thing instead of getting carried away in between with my own calculations. 😉
A smart assessment from you, as expected!
The distinct impact on individual countries shows how much geopolitics is dominated by proximity to energy resources, and how countries & states respond to their energy demands.
Thanks!
The asymmetry you identify between oil and gas substitution timelines is the most underreported angle on this crisis. The Iran Shock posts I've seen treat them as equivalent supply risks — they're not. What's striking from a European policy perspective is that this asymmetry was already visible before the Strait closed: negative electricity prices and curtailment in markets like Germany and Poland were already signaling that gas-fired generation was losing its price anchor to wind and solar faster than policy frameworks anticipated. The crisis accelerates a process that was already underway. I wrote about the European policy dimension here: https://groundtruthenergy.substack.com/p/the-iran-shock-wont-save-european
The thing about EV proliferation is that its expansion is seen in the west as a decade long process. China is making the switch from internal combustion to EV at a staggering pace and I bet this will accelerate with incentives to get rid of cars with an engine. The US is a lost cause at the moment but the rest if the world is interesting. Australia for example has -35 days of gasoline and diesel reserves. After that the country grinds to a halt. China has the capacity to allow rapid shift to EV. It has a “problem” with over capacity of production. My Chinese EV is superb and I’m done with oil. The EV transition might finally get us off oil much faster than you think possible.
What you're missing is that even the most rapid switch to EVs still has to roll through to the fleet. Car lifetimes are just under 20 years, so even if 100% vehicle sales were EVs tomorrow, it would take 5 years to reduce their oil demand by 20%. And that doesn't count petrochemical use of oil, or shipping and aviation.
I think high gas prices can change that dynamic in less than 20 years. For example, I own one EV and one gas car. When gas spikes I can choose to put most of my miles on the EV to save money. If gas goes high enough the yearly cost differential of ICE vs. EV makes those older gas cars more expensive to run than replacing with a used EV (even a new EV if we eventually get the kind of EV prices China can manufacture at - Hyundai is close now). In 2025 Americans spent an average of $2,500/year on gas, and EVs typically cost only 1/3 to 1/4 of gas to fuel. Plus with with 90% fewer moving parts and no oil, belts, fluid changes, EVs are much cheaper to maintain. Older gas cars get pretty costly pretty quickly (I learned this as a graduate student after I bought a "cheap" 12 yr old Audi for $2,800 and had to sink another $7,500 into maintaining it over the next year!). So the EV annual savings can get significant enough to retire ICE cars early, just like it's cheaper to build a new solar plant than to just maintain an existing coal plant. Similarly, our house is actually set up with both a propane boiler and minisplits/heat pumps that let us choose to heat with gas or solar electric whenever we want outside the colder days in winter, so we can adapt to fuel spikes pretty quickly.
Watch China. The next step is to take cars with an engine off the road. There are now 2 reasons for rapid switch : 1) climate emergency with expanding costs; 2) risk of oil crises. The US is not going to lead this. The world is bigger than the US market.
Please read my post: you're doing "feels", I'm doing numbers. It takes nearly two decades for cars to cycle out of the fleet. Nothing China can do will reduce oil demand by 20m barrels this side of 2040.
That’s true, but forcing internal combustion engines off the road prematurely triggers MASSSIVE transition costs. Scrapping functional vehicles effectively turns them into stranded assets.
The thing about a car with an engine is that it is a forever pollution machine. And it has so many parts to go wrong. Charging my BEV from my solar means true emissions free motoring.
China ‘gets’ the cost of emissions. I think we are approaching the time when reducing emissions will be a huge cost saving.
"The inflation risk facing the UK comes from supply shocks driven by war, energy disruption and broken supply chains. Higher interest rates cannot produce more oil, reopen trade routes or repair supply chains.
What they can do is damage the rest of the economy."
Interest rates can’t fix inflation now
Posted on March 11 2026
Funding the Future / Tax Research blog
One underappreciated angle: Hormuz is the first real stress-test of whether Western markets can price geopolitical tail risk correctly. So far, the answer is no — markets keep defaulting to a resolution-soon base case, which means every escalation creates outsized moves. The question for energy markets isn't just supply disruption — it's whether the pricing mechanism itself can handle a crisis that doesn't follow a Western timeline.
Bad analysis is not a specifically Western problem.
Michael, we welcome your thoughts on how unmanned airship drones could completely resolve the issue of the Strait of Hormuz within the next 2–3 years: https://furtherium.substack.com/p/how-the-strait-of-hormuz-problem
The deeper point is that Hormuz is a constraint-stack problem, not just a military one.
You can dominate targets and still fail to restore system legibility: shipping confidence, price stability, insurance, and predictable flow.
In modern conflict, tactical superiority matters less than the ability to reopen the infrastructure layer the global economy actually runs on.
Excellent article. With focus, I expect we could cut oil usage by 3-7% per year and keep that pace at least for a decade.
It isn't an immediate relief, but more of a long-term geostrategic movement. If we had taken more action during the first "hit" in 2022, the damage would have been reduced already.
We don't know the future, but EVs are a zero-regret strategy to lessen the impact of further oil price spikes.
It troubles me in many ways to say it, but this might be the most positively impactful thing to happen mankind in recent history. A fuel & energy crisis driving electrification and local energy security action. Is there no other proven way to drive a significant move towards carbon reduction?
Thought provoking. You state that 'gas is fungible,' which is true. However, LNG is relatively expensive to transport and has bottlenecks (for liquefaction and for gasification). The price of oil is dictated by global supply, but - correct me if I'm wrong - the gas markets have persistent regional price differences. Those markets that are heavily reliant on seaborne LNG will be impacted by a much higher amount, whereas those getting it piped won't be affected much at all (yes, of course if the price for the seaborne LNG goes up, more of that gas will be liquified and sold abroad, but it won't have the same impact as it would for oil). Let me know if I'm made any mistakes in my reasoning.
The oil-gas asymmetry holds on paper, but the assumption that lost Qatari LNG volumes get absorbed by wind and solar additions inside nine months ignores the baseload gap those cargoes fill in Southeast Asian grids — grids that don't have the interconnection or storage to ride intermittency. The substitution math works for Northwest Europe, maybe. For Pakistan, Bangladesh, Thailand? Those molecules have no replacement on any timeline that matters. The real question is whether prolonged Hormuz closure accelerates coal burn in Asia faster than it accelerates renewables in the OECD — and I suspect the answer is uncomfortable for the transition narrative.
The 9-month gas substitution math is elegant on paper, but it assumes a degree of grid flexibility and interconnection that doesn't exist in the markets most exposed to LNG loss — South Asia, Southeast Asia, parts of the Middle East itself. Bangladesh isn't adding 600 TWh of wind overnight. Pakistan's grid can barely handle what's already connected. The substitution thesis works for Europe and Northeast Asia, where infrastructure and capital are available. For the rest, the gap between losing Qatari LNG and building replacement capacity isn't 9 months — it's years. And those are the markets where the social and political consequences of power shortages hit first and hardest. The energy transition argument is sound directionally, but the timeline assumes a world that's more wired than it actually is.
https://thebluearmchair.substack.com/p/uk-naval-forces-deploy-to-straights?r=5kmhkr