The shutdown of the Strait of Hormuz was

not quite as bad as you probably

thought. It is true that in retaliation

for the US and Israel strikes in Iran,

the country's SEPA Navy broadcast the

following message over [music] VHF

marine radio.

>> From now on, all navigating through the

Strait of Hormuz is forbidden. No ship

in every type is not allowed to pass

from the Strait of Hormuz till next

[music] notice.

>> To back up that declaration, the Iran

Revolutionary Guard Corps attacked

vessels that dared try to transit the

waterway with missiles and drones,

sending a clear message to others,

grinding [music] traffic to a halt. It's

also true that 20% of the world's oil

passed through this choke point up until

the war.

>> [music]

>> But global oil production in March 2026

actually only shrunk about 8%. Prices,

however, spiked a massive 60%, seven and

a half times more than the contraction

in supply.

This is perhaps counterintuitive, but

how this happened and what happens next

is [music] explained by the full

complexity of the global oil markets.

The Gulf is undoubtedly the world's most

important oil production region. It has

both the greatest reserves and the

lowest cost of production, making it no

surprise that it quickly developed into

one of the world's greatest

concentrations of wealth. The smallest

country on the waterway, Bahrain, no

larger than the city of New York, is

still the world's 35th largest oil

producer, outputting about 200,000

barrels a day, even though its economy

is fairly well diversified away from oil

extraction. It focuses a good bit on

refining oil from Saudi Arabia, as well

as manufacturing, finance, and other

sectors. Neighboring Qatar is similar.

It's the next largest Gulf producer at

1.3 million barrels a day, though it too

has diversified its economy by

specializing in natural gas production.

Its Ras Laffan Industrial City is

single-handedly responsible for 20% of

the world's liquid natural gas supply.

Then there's Kuwait, the world's [music]

10th largest producer at 2.6 million

barrels a day. Though in this case,

there's little diversification. Oil

completely dominates the small country's

economy. These three nations, Bahrain,

Qatar, and Kuwait, were put in a tricky,

almost existential situation by the

closure of the strait as they're each

100% reliant on oil tankers transiting

the waterway to export their product.

>> [music]

>> It was absolutely devastating to their

economies, but less so to the global

economy as they collectively

represent just 16% of Gulf oil

production. Their influence on global

prices is rather minimal.

The rest of the Gulf countries though

are in a very different,

>> [music]

>> more promising situation. The next

largest producer, the United Arab

Emirates, produces about 4.1 million

barrels a day, more than [music] the

previous three combined, but crucially,

it has a small coastline on the other

side of the strait.

>> [music]

>> Most Emirati production is in or near

the Gulf as that's where the oil

physically is, but in 2008, it started

building a pipeline. While official

government statements tended to focus on

the cost and time savings of exports

bypassing [music] the strait, the true

purpose was hardly a secret. Iran had

long threatened to shut down the Strait

of Hormuz, and the UAE knew they could

actually do it. [music] It's only 20

miles wide, the shipping lanes are even

smaller, and all they'd have to do is

lay some mines or launch some rockets to

keep ships [music] from trying. Well,

before the war, a substantial portion of

the UAE's oil was loaded onto tankers at

Das Island, a slim majority was sent via

the pipeline and loaded at the port of

Fujairah, meaning the country was

already fairly [music] resilient when

this strategic threat came into reality.

Iran itself, the world's seventh largest

producer, has actually, [music] perhaps

counterintuitively, developed a very

similar strategy. Prior to the war, its

primary [music] export point was Kharg

Island. Like with the UAE and most of

its neighboring countries, the Iranian

Gulf shoreline is fairly shallow, so

this island, connecting to oil fields by

pipeline, allows large tankers to dock

[music] and load to full capacity.

Despite Iran's 4.2 million barrels a day

of production, 90% was exported via this

one terminal, an incredible

concentration. But just as other Gulf

countries were worried about Iran

shutting down the Strait of Hormuz, so

too was Iran for its foes, so it built

[music] its own pipeline to the other

side of the strait. The port of Jask was

rarely used in practice prior to the

war, but it's believed it could handle

about 15% of normal export flows with

existing infrastructure and more with

some upgrades.

Iraq, however, [music] is in a slightly

different situation. Its Gulf coastline

is tiny. It uses offshore platforms to

[music] load tankers that carry the vast

majority of its oil, but unlike the UAE

and Iran, it has no other coastline

beyond the strait. Instead, it has a

pipeline to a port in Turkey [music]

and on paper, this is hugely

strategically significant, perhaps even

more so than the UAE [music] and Iran's

pipelines. Not only does this bypass the

Strait of Hormuz, but also the Suez

Canal, which itself has been a spotty

trade route in recent years due to

attacks on ships by Houthis [music] in

Yemen. In practice though, Iraq's

pipeline is itself fickle thanks to the

country's tenuous politics. It's [music]

routed through the ethnically distinct

region of Kurdistan, which while part of

Iraq, has its own autonomous government

and in many ways acts as a separate

[music] state. Kurdistan's government

constantly quarrels with Baghdad over

whether it has the right to export oil

independently and uses the pipeline as

leverage, meaning the political winds of

the moment dictate whether this pipeline

[music] actually works in practice. Over

recent years, it's predominantly been in

a non-operative state, but this shifted

in response to the Strait of Hormuz

closure with an agreement made between

Baghdad, Kurdistan, and Turkey a few

weeks into the war. It's believed

[music] that in time, this route could

ramp up to 600,000 barrels a day,

representing close to 15% of pre-war

export totals.

Lastly, there's Saudi Arabia, the Gulf's

definitive [music]

oil production giant. It is the only

Gulf country with a Red Sea coastline,

and it's taken advantage of this to

build a massively capable contingency

plan. It's 750-mi 1,200-km [music]

east-west pipeline was built in response

to the Iran-Iraq War in the '80s, and

while Iran never closed the strait

during this conflict, [music] both it

and its enemy attacked tankers in the

Gulf, and Saudi Arabia believed a

closure could be a natural evolution of

the strategy. It's not entirely clear

exactly how much capacity [music] the

country could divert via this route.

While the pipeline itself can operate at

as much as 5 million barrels a day, and

could potentially surge to 7 million a

day by converting its parallel natural

gas line to carry crude as well, [music]

analysts believe the bigger constraint

is the tanker loading terminals at its

terminus, the Port of Yanbu, citing

perhaps just 5 million barrels a day of

capacity. Regardless, [music] that's a

tremendous amount of oil. So much so

that it still maintains Saudi Arabia's

spot as the world's third largest

producer despite the closure of the

strait.

Collectively, these four pipelines

provide considerable export capacity,

dampening the impact of the strait's

closure. And that's added to the fact

that even as Iran blockaded the strait,

a drip feed of tankers were getting

through. So far, these have

predominantly been those exporting

Iranian oil or linked to Iranian allies,

but regardless,

>> [music]

>> considering oil is a global market, the

supply these carry provides downward

pressure on global oil prices. While the

supply shock certainly has been bad,

when you add these all together, it's

potentially smaller than what the

headlines might imply. So, why does an

8% contraction in supply lead to a 60%

jump in price?

Well, there's a concept in economics

called elasticity of demand.

Effectively, it's the relationship

between price and demand. For example,

breakfast cereal is typically a fairly

elastic product. Considering buying one

particular brand is not necessary, it's

just a preference, the price charged

influences people's decision-making a

good bit, at least on average. Academic

research has shown its average

elasticity of demand is -3, meaning a

10% increase in prices will [music] lead

to a 30% drop in demand. Consumers will

just buy another brand or switch to

something else for breakfast. There are

plenty of substitutes. This also works

in the inverse. If there's too much

demand for a particular brand of cereal,

more than can be manufactured, then the

brand knows that they can raise prices

10% for every 30% drop in demand they

want to induce, [music] thereby allowing

them to optimize revenue.

This concept also applies to the oil

market. In March, there was about an 8%

contraction in supply, so prices rose to

get rid of a corresponding amount of

demand. The problem, though, is that oil

is an incredibly inelastic product.

Unlike breakfast cereal, there's really

no immediate substitute for oil.

Internal combustion vehicles just simply

need oil to run. And the way vehicles

are used is hard to change, too. Among

personal vehicles, for example, 3/4 of

driving in the US is for

non-discretionary journeys like

commuting, buying groceries, dropping

kids off at school, etc. [music]

And even among discretionary trips,

heading out to eat, driving to the gym,

going on a weekend road trip, people

mostly won't let gas price increases

dissuade them from doing what they want

to do. Even if people learn to cut back

on driving or switch to public

transport, personal vehicles only

account for about a quarter of global

oil use. The rest is commercial, and a

trucking company certainly isn't going

to stop trucking because oil prices are

up. They'll charge more, which might

reduce demand eventually, but not in the

short term. Long-term elasticity of

demand is different. People will

eventually buy EVs, shorten their

commute, and make other choices that

reduce oil use, but in the short term,

academic research looking at historical

precedent suggests oil has an elasticity

of demand of around -0.1.

The opening weeks of the war in Iran

largely, but don't entirely mesh with

this. Its 8% contraction in supply and

60% price increase implies a -0.13

elasticity of demand. And while that's

close to what theory suggests, it's not

quite there.

Anecdotally, experts have backed up this

view. Even the CEO of Exxon has

effectively said he thinks prices are

lower than where they should be. But how

can a market under react? Well, this

market is not perfect. It has subjective

fallible actors of incredible influence,

otherwise known as commodity traders.

This finance sector makes its money by

betting on what oil prices will do in

the future and through that [music] are

one of the largest artificial influences

on how oil prices move today. Through a

combination of physical oil purchases

and financial instruments like futures

contracts, they move the market ahead of

the supply and demand induced moves. For

example, if they believe supply will

eminently contract and therefore prices

will rise, they'll all rush to buy

physical oil, store it for a moment,

contracting short-term supply and

raising prices. So, of course, when done

at scale, this becomes a self-fulfilling

prophecy where what commodity traders

are really betting on, at least in the

short term, is what other commodity

traders will do. The effect this has on

the market is that [music] the

day-to-day movements follow a mix of

narrative and reality. If a large

consensus [music] of traders believe oil

prices will rise, then oil prices will

generally rise. If they believe they'll

fall, they'll fall.

And this helps [music] explain this. In

the opening days of the conflict in

Iran, the market's reaction to the

closure of the single largest oil choke

point in the world was rather muted. The

US and Israeli strikes started in the

early hours of Saturday, February 28th,

meaning traders had two whole days when

the market was closed to reflect on its

implications. And yet, following a full

day of trading on Monday, prices had

only risen a fairly modest 6%. [music]

Tuesday's rise was less than 5%. Then

Wednesday, the market was effectively

flat, even as insurers were canceling

policies and more and more reports were

coming in of drone strikes on ships in

the Gulf.

What was happening was [music] that, as

they always are, commodity traders'

decisions were being influenced by

narrative. Among them, there was a

widespread belief in the opening days of

the war that it would be a limited,

short-term conflict. After all, the

second sentence [music] of President

Trump's initial statement about the

strikes read, "Our objective is to

defend the American people by

eliminating imminent threats [music]

from the Iranian regime." Which implies

a limited military operation. Despite

the frequent disconnect between what

this administration says and does,

traders took these statements at face

value, seemingly based on precedent.

[music] Whether it was the operation in

Venezuela to capture Nicolas Maduro, the

strikes on ISIS targets in Syria in

response to the killing of two US

service members, or the June 2025

operation in Iran itself where the US

dropped bunker buster bombs to

supposedly [music] obliterate Iranian

nuclear assets, the Trump administration

had so far kept the scope of its

military campaigns limited. After all,

wars tend to be politically unpopular,

and Trump campaign messaging included

accusations that his opponent would

start a war in Iran, implying reluctance

to let the conflict escalate. So,

traders took the administration at their

word, but then reality happened.

You see, as soon as Tehran started

firing missiles and drones across the

Middle East, all the world's major

marine insurance companies almost

simultaneously published letters like

[music] this. This is a cancellation

notice for this insurer's war risk

insurance. The value of a very large

crude carrier ranges between 80 and 130

million dollars, and even at pre-war oil

prices, its cargo is worth upward of 130

million dollars. This means that ship

owners simply have to have insurance.

It's just too big of a risk for a single

company to bear independently. Owners

hold policies for just about every risk

imaginable: groundings, collisions,

breakdowns, fire. But, the major

insurers operate an independent body

called the Joint War Committee that

essentially decides which global regions

are at high risk for conflict. In recent

years, this has included places like the

coast of Venezuela, Gulf of Guinea,

Black Sea, Red Sea, and all the waters

near Iran. Within these areas, vessels

are effectively required to carry

additional war [music] risk insurance to

cover strikes by missiles, drones,

mines, and more. But crucially, these

policies can be canceled by the insurers

with 72-hour notice,

>> [music]

>> and this is exactly what all the

insurers did when the war started. This

was one of the biggest plot points that

woke the market up to the reality of

this disruption. Regardless of the

physical impediments, bureaucratic ones

made it functionally impossible for oil

to flow out of the Gulf.

As days turned into weeks, some insurers

started writing policies again, but if

anything, these gave the oil market more

reason for concern as the cost of war

risk insurance had gone up more than

10-fold, often selling for around 3% of

the ship's value per journey rather than

the 0.1 to 0.25% in the [music] weeks

leading

up to the war. This makes for a massive

additional cost that is unlikely [music]

to subside soon since hypothetical

threats turned into reality. That's to

say, due to this and other changes,

progressively [music]

through March, the intractability of the

disruption to global oil flows came into

focus, and the market responded

accordingly.

Even as diversion routes ramped up in

the second half of March and the

contraction [music] in supply shrunk

smaller, oil prices continued to hover

near $100 a barrel. For every bit of

supply that came back online, traders'

sentiments appeared balanced in the

other direction by growing concern about

the potential length of the disruption.

The illusion of Gulf stability has been

shattered. Over recent years, as these

countries grew wealthier and more

developed, the market started to believe

that they were geopolitically isolated

from the tumult [music] in the broader

Middle East. Iran's ability to shut down

the entire region's economy overnight

demonstrated the frailty of that belief,

[music] and so So continued supply of

Gulf oil is not as guaranteed as markets

might have thought before the war began.

The market will likely price this

uncertainty in long-term. So until the

Strait of Hormuz is no longer relevant

for global oil logistics, the

uncertainty in its continued operation

will likely have the entire [music]

world paying more at the pump.

You might be surprised to learn that the

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encounter all the time while in Europe

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