The Critical Role of Supply Security in Global Oil Markets
Oil markets are often discussed in terms of prices, with governments tracking their impact on inflation, consumers monitoring fuel costs, and central banks analyzing how energy prices affect economic growth. However, the historical experience of energy markets reveals a different reality: while the global economy can adapt to higher oil prices, it faces far greater challenges when there are disruptions in the supply chain itself.
The global energy system is not solely driven by prices. It depends on the continuous movement of oil through an interconnected network of fields, pipelines, refineries, ports, and tanker routes. When one of these critical links is disrupted, prices alone cannot maintain market stability. In other words, markets may adjust to higher prices, but they cannot function without the physical movement of oil.
Security of Supply
Markets can gradually absorb higher prices, but the global energy system fundamentally relies on uninterrupted flows of supply. Refineries require crude deliveries on precise schedules, while global energy trade operates through a complex structure of logistical and financial contracts. When transportation routes become unstable, the ability of prices alone to regulate the market weakens. Prices may rebalance supply and demand, but they cannot move oil across oceans.
For this reason, when geopolitical tensions rise in the Gulf, markets begin to add what is known as a geopolitical risk premium to oil prices. Estimates from several energy market analysts suggest that this premium can range between 10 percent and 25 percent during periods of heightened tension. If oil is trading at $80 per barrel, the risk premium alone could lift prices into a range between $88 and $100 per barrel, even without any actual disruption in production.
In such situations, prices reflect concerns about the reliability of supply rather than the scarcity of resources. This anxiety is also visible in the oil forward curve. Under normal conditions, the market often trades in backwardation, where spot prices are slightly higher than future prices due to strong immediate demand. But during periods of geopolitical stress, future prices may rise to reflect the possibility of supply disruptions. In other words, markets are not only pricing the oil available today; they are also pricing confidence in its future delivery.
The Strait of Hormuz: The Most Sensitive Artery of the Energy Market
At the center of this equation lies the Strait of Hormuz, one of the most strategically sensitive maritime passages in the global energy system. Approximately 20 to 21 million barrels of oil pass through the strait every day, representing roughly one-fifth of global oil consumption and about one-quarter of global seaborne oil trade. The passage also carries a significant share of global liquefied natural gas exports, particularly from Qatar, which accounts for roughly 20 percent of global LNG trade.
This heavy reliance makes the stability of navigation through the strait a key factor in maintaining global energy market stability. When supply disruptions occur, markets typically rely on oil inventories as a temporary buffer. Estimates suggest that storage capacity in the Gulf region ranges between 300 and 400 million barrels of crude oil, in addition to 120 to 180 million barrels of refined products, bringing total storage capacity to approximately 420 to 580 million barrels.
Compared with Gulf production of roughly 21 million barrels per day, these inventories represent around 20 to 30 days of production. However, these stocks are not designed to compensate for prolonged interruptions in exports. Rather, they serve to soften short-term disruptions and provide markets with limited time to reorganize supply flows.
Geographical alternatives are also limited. Saudi Arabia’s East-West pipeline, which carries oil to the Red Sea, and the Habshan-Fujairah pipeline in the United Arab Emirates provide partial export routes outside the Gulf. Yet their combined capacity can only replace a portion of the volumes that normally pass through the strait. If exports through this critical passage were disrupted for an extended period, as much as 20 million barrels per day could be prevented from reaching global markets. Even with alternative pipelines operating at full capacity, they could replace no more than one-quarter to one-third of those volumes under the best circumstances.
In such a scenario, oil prices could rise sharply. Some estimates suggest that prices could exceed $120 to $150 per barrel if disruptions persist for an extended period.
For this reason, the Strait of Hormuz is not simply a geographic feature of the energy map; it represents a major stress test for the stability of the global energy system.
Lessons from History
History shows that energy markets are extremely sensitive to disruptions in supply. During the 1973 Arab oil embargo, oil prices quadrupled within months, pushing the global economy into a period of inflation and economic slowdown. Similarly, the 1979 Iranian Revolution triggered another surge in oil prices, even though the actual loss of global supply was relatively modest. More recently, the 2019 attacks on Saudi Aramco’s Abqaiq and Khurais facilities demonstrated how a single event could disrupt nearly 5 percent of global oil supply within hours, causing oil prices to jump by around 20 percent in a single day.
The most important lesson from these events is not simply the rise in prices, but the speed with which markets react when the flow of supply itself becomes uncertain.
Conclusion: Security of Supply Before Price
Ultimately, the global energy system does not operate on price alone. It relies on the continuous and reliable movement of oil from producing regions to centers of consumption. For this reason, the stability of maritime transportation routes — particularly the Strait of Hormuz — remains a fundamental pillar of global economic stability.
Markets may adjust to higher prices, and over time supply and demand can rebalance. What markets struggle to absorb, however, is a disruption in the physical flow of energy itself. In a global economy that depends on the daily movement of energy, the lesson remains clear: Prices may reflect risk, but it is the stability of supply that keeps the global economic system functioning.
