Illustration by Lee Woodgate / Ikon Images
The amount of oil being held back from the market is about 10 million barrels per day, and will soon rise to 12 or 13 million. To put that in perspective: in a normally tight oil market, prices start climbing with a shortage of just 1 million barrels per day over the course of a year. Fatih Birol, head of the International Energy Agency, has warned that this is the worst energy crisis in decades, “more than two major oil shocks put together”. At the moment, oil prices remain relatively low, but it all depends where you look. Oil futures tell only a small part of the story. Where there is an immediate need, prices are already exploding, with the Oman and Dubai benchmarks reaching record levels and bunker fuel being rationed in Singapore. While the US only imports 3 per cent of its oil through the Strait of Hormuz, the same cannot be said of its allies in Asia and Europe, but these are the very economies the US relies on to buy its bonds and stocks and, thus, prop up the dollar system as it exists.
Prices may never tell the full story because markets are so broken. With shortages this large, geopolitics rather than markets will allocate energy resources. Already, Japan and South Korea are lined up for the role of sacrificial victims. Their economies are so dependent on global trade and energy inputs that a recession is now more than even odds.
For the US, however, the most dangerous pressure point may not be oil at all. It is the bond market. The yield on the ten-year Treasury bond rose to 4.43 per cent on 23 March, close to the threshold that last year forced Trump to retreat from his full tariffs announcement. The arithmetic is straightforward and brutal: if yields keep climbing, stocks and property prices fall. The American economy could never handle a yield of 5 per cent. Mortgage rates are already heading back above 7 per cent. Does Trump panic at 4.6 per cent? At 4.7 per cent? The margin is thin, and everyone on Wall Street knows it.
Sure enough, with yields flirting with 4.5 per cent, Trump posted on social media that planned strikes on Iran’s energy infrastructure had been postponed for five days. Oil markets exhaled. Brent crude plunged. The episode was a preview of what is coming: a stream of dramatic announcements and hasty reversals, each one sending markets lurching in a different direction. Trying to trade the noise is a fool’s errand. It is better to focus on the underlying variables, and those are deteriorating steadily.
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The Middle East accounts for 34 per cent of global crude oil supply, the base feedstock for fuels and chemicals worldwide. Less widely known is its 33 per cent share of the helium market, a critical input for semiconductor manufacturing and aerospace applications. The region supplies 30 per cent of global methanol, a building block for plastics and solvents, and 4 per cent of butadiene, used to produce synthetic rubber and engineering plastics. These feed into an enormous range of industries, from automotive and construction to healthcare and consumer goods. About a third of global fertiliser supply passes through the Strait of Hormuz. Predictably, prices have moved up to their highest levels since September 2022, driving food prices higher. Palm oil is up 13 per cent. Rice is up 7 per cent. This is not an oil shock but an everything shock. We may soon need to ground planes and accept lower crop yields and food riots in the developing world.
Everyone even minimally familiar with the sector knows how dependent the AI boom has become on Gulf sovereign wealth. Riyadh and Abu Dhabi have poured tens or even hundreds of billions into data centres, AI infrastructure and Silicon Valley funds. That capital is now in question. When the Gulf states are managing an active conflict and collapsing energy revenues, writing nine-figure cheques to Californian start-ups moves down the priority list. Several venture deals quietly in progress are already on indefinite hold.
Even before that funding dries up, the physical infrastructure of AI is under strain. The Taiwan Semiconductor Manufacturing Company, which manufactures 90 per cent of all advanced chips, consumes more energy than the entire population of Sri Lanka. In 2020, it accounted for about 6 per cent of overall energy consumption in Taiwan. In 2023, the figure was 8 per cent. But the country relies on the Middle East for more than a third of its liquefied natural gas needs. High energy prices will also filter into much higher costs for training and using AI models. Fewer ships through Hormuz mean fewer and much more expensive chips. AI needs money, data centres and energy. All three are suddenly in question.
Perhaps the most striking feature of this crisis is how deliberately Iran moved to make it an economic war, targeting the three weakest points of the American economy: inflation, interest rates and an overbought stock market. Even before the war, equities felt dangerously stretched. A single blog post about AI disruption from Citrini Research on 22 February was enough to send software stocks diving. With a genuine global supply shock unfolding, no vague pretext for a much larger correction is needed.
Trump wants to de-escalate before the damage becomes irreversible. But Iran will not simply stand down without credible guarantees that it won’t be bombed the moment the crisis passes. And that is precisely what Trump can no longer provide. He has spent the past year burning through the goodwill and predictability that make such guarantees meaningful. Without trust, deals don’t hold. Without deals, the pressure keeps building. The house of cards is already beginning to collapse, not in full view, not all at once, but steadily, quietly and from multiple directions at the same time.
[Further reading: Donald Trump’s oil crisis will come for you too]
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