Ryan Avent is a journalist, author of In Good Faith, and writes a newsletter called The Bellows.
The bombs that began falling on Iran in February raised a giant cloud of uncertainty, among other things. Only one thing seemed clear at the time: that a prolonged closure of the Strait of Hormuz would be economically catastrophic. Since then, things have gone nuts. So where’s the crash?
The war’s oil shock was epic in scale. As the International Energy Agency put it in March:
The war in the Middle East is creating the largest supply disruption in the history of the global oil market. With crude and oil product flows through the Strait of Hormuz plunging from around 20 mb/d before the war to a trickle currently, limited capacity available to bypass the crucial waterway, and storage filling up, Gulf countries have cut total oil production by at least 10 mb/d. In the absence of a rapid resumption of shipping flows, supply losses are set to increase.
Shuttered Middle East production came to about 10 per cent of global demand. But global oil stocks were relatively flush when the war began, leaving the world a cushion against a brief closure of the strait.
Experts reckoned that the pain from a short-term shock would be limited and fall mostly on the Asian economies which imported directly from the region. A disruption lasting into the summer might seriously harm global growth. And a global recession might result if flows were not restored before the autumn.
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Yet here we are, in the war’s fifth month. Autumn is in sight, and things don’t look all that bad, macroeconomically speaking.
Before the war, the IMF planned to publish a global growth forecast for 2026 of 3.4 per cent in its April World Economic Outlook, in line with actual growth in 2024 and 2025. Taking on board the effects of the war, the IMF revised that April forecast down to 3.1 per cent, but warned of worse scenarios in which higher oil prices for longer might drag growth as low as 2.0 per cent. Yet the newly published July update includes only a mild downgrade relative to April, to just 3.0 per cent. That isn’t an inconsequential slowdown, given the size of the global economy, but neither is it a disaster.
What happened?
In part, high prices early in the war sparked market adjustments that blunted some of the shock’s impact. A severe jet-fuel crisis in Europe was averted thanks to the redirection of exports from other countries and an impressive production response from refiners, for example. Crude production from the Americas, and especially among South American exporters like Brazil and Guyana, helped offset more of the Gulf shortfall than had been anticipated. Despite this, the world continued to face an enormous supply crunch.
Two other factors have mattered more.
The first is the cushion provided by oil stocks. Stocks were high coming into 2026, partly because of increased production in the Americas, but also due to significant stocking by China. When the war began, China leaned on its inventories and reduced oil imports by 40 per cent. Plenty of other countries have also run down their stocks.
Through June, stocks held by OECD economies have fallen by roughly 225mn barrels, to lows not seen since the 1980s. As the chart below indicates, inventory drawdowns offset about 3.8mn barrels a day of the shortfall induced by the war: a hefty contribution relative to the 6mn barrels a day in reduced consumption.
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Importantly, these draws continued through the period of the ceasefire, as oil prices gave back nearly all of the increase from February through April. Over the past month, as the price of West Texas Intermediate held below $80 per barrel, the US Strategic Petroleum Reserve released about 30mn barrels of oil, taking the level of the SPR down to a volume of 319mn barrels, the lowest since 1983. Since March, the US has released nearly 100mn barrels, or a quarter of the volume in the SPR.
The world has thus spared itself a lot of pain by running down its stocks. It has also left itself highly vulnerable to continued oil supply disruption. The 319mn barrels remaining in the SPR may seem like a lot, but a very large share of onshore oil inventory is in effect a part of the system, needed to keep things from falling apart. Literally, in some cases, as JPMorgan’s energy analysts noted back in May:
The SPR has a practical operational floor near 150–160 mb that must remain in place to preserve cavern stability and maintain operational flexibility, including a small portion of “roof oil” that cannot be withdrawn.
If this is accurate, then draws on the SPR at the rate of reduction seen in May could exhaust remaining SPR capacity within four months. The global picture looks similarly worrying. In April, JPMorgan’s head of commodity strategy estimated that there were roughly 800mn barrels in usable oil stocks available at the beginning of the war. The world has probably run through at least half of that, and the IEA reckons that global onshore stocks fell by about 100mn barrels in June.
Put simply, a worse outcome for the global economy has been averted by unsustainable declines in oil inventories. And unfortunately, the war still appears to be on.
That brings us to the other main factor propping up growth around the globe: the incredible strength across global technology supply chains. As the IMF explains:
[T]he top four net exporters of AI-related hardware (Taiwan…Korea, Thailand, and Malaysia) had an average seasonally adjusted annualized [growth] surprise of 4.4 percentage points, whereas the surprise for the world’s remaining countries was –0.3 percentage point. Korea, despite its heavy reliance on imported energy from the Middle East, surprised with a 7.5 percent growth rate, more than four times the 1.8 percent projected in April, powered primarily by a semiconductor and AI-hardware export boom…
China and Japan also overperformed their IMF growth forecasts, thanks in large part to strong tech-related exports: which is to say, the AI boom.
The tech boom thus represents its own independent risk to global growth. If the return on AI investment begins to seem . . . illusory . . . then investment levels might be slashed, knocking away an important driver of growth. Of course it could also be the case that AI exuberance and investment continue, helping the world economy to power through what might otherwise have proven a debilitating oil shock.
Whether financial conditions would permit that in the face of renewed conflict and tightening oil markets is unclear. Tumbling equities and widening spreads could make the next hyperscaler mega-offering considerably harder for markets to digest.
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The AI boom’s surging financing needs have brought greater entanglement between the AI complex and broader financial markets, as the Bank for International Settlements recently warned in its annual report. A new round of market volatility which choked off AI investment might therefore trigger a financial shock worse than any war-related scenario markets have so far contemplated.
That probably won’t happen. Some new deal to calm the fighting will no doubt be announced soon. Eventually, shipping through the strait will rise back to something like the prewar norm. It has to, right? After all, a prolonged closure of the Strait of Hormuz would be economically catastrophic.
