Publication
Energy Security, Geopolitics and Global Markets
One hundred days in: The energy crisis that is deeper, longer and costlier than markets admit
Publication
One hundred days in: The energy crisis that is deeper, longer and costlier than markets admit
It’s been hundred days since the world's most critical energy chokepoint closed. The IEA has called this the largest supply disruption in the history of global oil markets, three to five times larger by volume than the 1973 OPEC embargo. Sustaining current supply is costing US$1-2 trillion annually, equivalent to 1-1.5 per cent of global GDP. OECD inventories are approaching their lowest level since 2003, and when China begins restocking - as it will - demand pressure will intensify sharply.
However, over the last eight weeks, market behavior - equity indices near record highs, Brent pricing in ceasefires that have not materialised - reflects hope, not analysis.
O'Sullivan, who also served as former US Deputy National Security Advisor, was clear a deal would be limited - a partial normalisation, not a restoration of pre-war conditions. Under a deal, Iran will exercise more influence over passage of ships, and the threat of renewed disruption. "The geopolitical risk premium around the Gulf will likely not return to pre-war levels," she added.
News broke over the weekend, following our conversation, that the US and Iranian officials have agreed to a framework to end hostilities, halt the US blockade and reopen the Strait of Hormuz, with an official signing of a memorandum of understanding (MoU) scheduled on 19 June. Markets that had been pricing in hope now have a headline to point to. But, in reality, a signed MoU is not a fait accompli or direct route to restoring energy supply. Execution risk remains the central variable.
King drew the sharpest historical lesson. After 1973, Germany's Bundesbank treated the oil shock as an inflation problem, raised rates, and kept inflation to a peak of 8 per cent. The UK prioritised growth and offered stimulus; inflation reached 26.9 per cent. "Act on inflation first," King said, "and worry about the growth consequences second." Central banks know this and cannot afford to repeat their Covid-era error of misreading a supply shock as a demand shock.
The complication: core inflation in the US, UK and eurozone was already running above target before this crisis, highlighted in the latest US inflation numbers of 4.2 per cent for May. "Kevin Wash, appointed as Fed Chair on a platform of AI-driven productivity and lower rates, now faces a scenario in which he may be forced to raise them precisely when the administration is most politically vulnerable" added King.
O’Sullivan noted "The prospect of an American energy export restriction has circulated through Washington in at least two rounds of White House discussions, and the political logic is straightforward: if the United States is energy dominant, why are American consumers paying elevated global prices?". The historical precedent exists - Congress imposed a ban on crude oil exports after 1973, a restriction that remained until 2015 when domestic overproduction made it an inefficiency rather than a protection. As O'Sullivan explained, "disconnecting the American oil market from the rest of the world would be a major shock to the global economy, where markets run much deeper."
The crisis is restructuring global capital flows. "US LNG exports to Asia have nearly doubled; the IEA projects US oil exports of 4.2 million barrels per day across 2026, making America the crisis's largest single beneficiary. Gulf sovereign wealth will redirect capital toward defence, infrastructure resilience and technology. Beyond the Gulf, Kazakhstan, Canada, Brazil and Guyana are all gaining ground in a structurally higher-price world," noted O’Sullivan.
For boardrooms, three priorities remain. First, audit exposure across the full energy value chain - not just crude, but jet fuel, diesel, LNG feedstocks and petrochemical inputs embedded across your supplier base. Second, revisit supply agreements, price escalation clauses and force majeure provisions drafted for a pre-crisis environment. Third, model explicitly for prolonged disruption into 2027, and for the restocking demand surge - led by China - that will follow any partial reopening of the Strait.
The energy transition will accelerate, but not cleanly. Electrification will be driven by energy security logic rather than climate ambition and creates new dependencies in critical minerals supply chains where China holds structural advantage.
"Electrification does not eliminate geopolitical vulnerability - it relocates it," explained O'Sullivan. Reducing dependence on the Gulf's physical chokepoints substitutes a supply chain risk that is, in some respects, more concentrated: China controls dominant positions in rare earth processing and the Democratic Republic of Congo supplies the majority of globally traded cobalt. Beijing has already demonstrated willingness to weaponise these positions, imposing a critical minerals licensing regime on US exports last autumn with immediate economic effect. "I would take the clean energy vulnerability over the oil and gas one. That may be the right long-run trade. It is not, however, the problem on most boardroom agendas this quarter," added O’Sullivan.
The crisis is restructuring global capital flows in ways that will outlast any ceasefire, and three dynamics deserve particular attention.
The first is AI. The energy shock is a direct constraint on the AI build-out: data centres already account for 50% of electricity demand growth in the United States, and the US competitive advantage in AI rests partly on domestic energy costs running at a quarter of European levels. That gap is widening as the crisis deepens, with material implications for technology infrastructure investment and the competitive position of energy-intensive economies.
The second is petrodollar recycling. King referred to the 1970s precedent. "Middle Eastern surpluses that flowed through American banks into Latin American sovereign lending fuelled a debt boom that lasted until Paul Volcker raised rates to double digits, triggering the Latin American debt crisis of the 1980s - the very unfortunate long-term effect of this recycling". Today's surpluses are flowing toward defence and security diversification, infrastructure resilience and technology, with Gulf states competing to attract hyperscaler investment despite the reputational headwinds of geographic proximity to the conflict.
Financial institutions and investors should map their exposure to these flows - both the opportunity in infrastructure, defence technology and sovereign wealth co-investment, and the risk in overleveraged energy-importing economies that history suggests will struggle when the recycling tide turns.
The third is defence. O'Sullivan explored how Gulf states are seeking not just to deepen their US security relationship but to achieve strategic autonomy they did not previously prioritise, directing significant capital toward defence capability, single-point infrastructure vulnerabilities and technology hubs.
The legal and commercial architecture of the energy sector was designed for a more predictable world. It is being stress-tested in real time. Force majeure provisions, sanctions carve-outs and price stabilisation mechanisms are no longer standard clauses - they are live negotiating points. Meanwhile, governments facing simultaneous demands on the public purse - energy subsidies, defence budgets, debt servicing and the capital cost of the electrification push - have less fiscal room to absorb shocks than at any point in recent memory. Something will give.
For boardrooms, the forward-looking question is not just how to manage current exposure, but how to structure long-term energy supply, critical minerals offtake and infrastructure agreements for a world in which geopolitical risk, fiscal constraint and the accelerating transition are permanent features of the landscape rather than temporary disruptions.
