The Price of Fire

Three months after hostilities closed the Strait of Hormuz, roughly 15 percent of the world's oil supply remains offline. Even as Wall Street just had its best month in years, the crisis has remade daily life across the Global South.

The restaurant near Kaloor International Stadium, in the major port city of Kochi in the southern Indian state of Kerala, still has a menu. It just isn't the same one.

Dosa, a thin, crispy crepe made from a fermented batter of rice and black gram, and a mainstay of South Indian cuisine, is gone. Another staple, the Appam, a thin pancake made with fermented rice batter and coconut milk has disappeared too. Anything that keeps a tawa, a versatile circular cooking pan, burning for hours is gone. "We are at a point where the menu is no longer a list of what we can cook," Deepak, the owner, said in an interview with Onmanorama, "but a list of what we can afford to heat."

Across town, Josemon runs a roadside thattukada — a traditional food stall whose name derives from the Malayalam words for plate (thattu) and shop (kada) — in the neighborhood of Irumpanam. He has stopped serving late at night.

"We don't have enough cylinders to work for that many hours now," Josemon told the English-language website of newspaper Malayala Manorama. "Items in our menu have been cut down and this results in losing many customers."

"We don't have enough cylinders to work for that many hours now."

To maintain the freshness that regulars expect from roadside stalls like his, he explained, he must keep the stove burning for hours — next to impossible with cooking gas now so scarce. He has narrowed his offerings to items that can be prepared quickly or in bulk.

Three months ago, a conflict that most of the world learned about through a news alert has rearranged the economics of daily life from Kochi to Karachi.

When hostilities broke out in the Persian Gulf on Feb. 28 and effectively closed the Strait of Hormuz, the closure halted more than 20 million barrels a day of seaborne transit, crude and refined products combined, and forced Gulf producers to shut in 14.4 million barrels a day of total liquids production as onshore storage capped out and tankers had nowhere to go. Roughly 15 percent of global supply, gone in a matter of weeks. The International Energy Agency, in its May report, described the resulting supply crunch as having no peacetime precedent in the history of the oil market.

The price on North Sea Dated, a benchmark for the physical delivery of crude oil encompassing over 70% of the globe's seaborne oil trades, hit $144.68 per barrel on April 7, an all-time record. It has since eased to around $110 — still more than 50 percent above where it stood when the first shots were fired — as coordinated releases from strategic petroleum reserves across all 32 member countries of the agency inject supply into a market losing more than 12 million barrels a day from its normal flow. 

Oil traders are buying the relief. 

The 186 tankers currently trapped inside the Gulf, carrying 92 million barrels of crude and products that cannot leave, tell a different story. This physical paralysis has sent war-risk insurance premiums soaring, prompting a coalition of commercial underwriters and the U.S. Development Finance Corporation to expand emergency maritime reinsurance coverage to $40 billion in early April.

For the industrialized world, the shock has registered as an inflation number, a gasoline receipt, a revision to the economic growth forecast. For the economies of the Global South, the ones that import every barrel they burn, that carry their debt in dollars, that cannot afford both food and fuel, it has arrived as something closer to a rupture.

No Respite

The one factor that might have cushioned the blow has not shown up.

In 2022, when oil prices surged in the wake of Russia's invasion of Ukraine, the U.S. Dollar Index strengthened sharply, compounding the cost of dollar-denominated energy imports for emerging-market economies. This time, the dollar has barely moved. The Dollar Index has held within a few points of its prewar level, even as the currencies of major oil importers have come under pressure.

It sounds like good news. For Pakistan, India, Egypt, Sri Lanka, and the Philippines, it is not nearly enough.

"The biggest risk does not come from oil prices alone," Amer Zafar Durrani, a former World Bank official and chief executive of the energy advisory firm Reenergia, said in an interview with Al Jazeera. "The real macroeconomic trigger is currency depreciation, which amplifies the impact of higher oil prices on domestic inflation."

"The real macroeconomic trigger is currency depreciation, which amplifies the impact of higher oil prices on domestic inflation."

Mr. Durrani was speaking specifically about Pakistan, but the dynamic holds across the region.

A flat dollar combined with oil prices 60 percent above prewar levels still constitutes a severe terms-of-trade shock. The absence of extreme dollar strength is a marginal reprieve, not a cushion.

An Achilles Heel

India imports roughly 87 percent of its crude. In February, before the war, its crude basket averaged $69 per barrel, according to the International Energy Agency. By March, it had hit $113. The Indian rupee, already near record lows, has offered no shelter. The country saw $20 billion in equity outflows in the first four months of the year, the agency reported, as foreign investors reassessed their exposure to energy-import-dependent emerging markets.

The government has held pump prices steady through subsidies and the quiet arm-twisting of state refiners. It has worked, in the narrowest sense: bus fares have not spiked, and food delivery costs have not soared into the kind of street-level anger the government fears. The cost of that decision is being borne elsewhere.

Imports of liquefied petroleum gas, the cooking fuel that supplies roughly half a billion Indian households, fell more than 40 percent from January and February levels, the agency reported. State retailers sold only about 1.15 million metric tons in the first half of March alone, a 17.3 percent year-on-year and 26.3 percent month-on-month decline, Reuters reported, leaving India facing a deficit of 25 to 30 percent in its overall supply of the fuel.

In cities and towns across Uttar Pradesh, Rajasthan, and Bihar, dealers report multiweek waiting lists and periodic stock-outs. Restaurants from Kochi to Patna have been forced back onto coal, firewood, and induction cooking. The health and climate toll of that reversal, including indoor smoke, deforestation, and carbon emissions, is the one cost that does not appear in any government subsidy ledger.

The jet fuel market is compounding the damage in ways that filter through to food costs.

Jet fuel cracks — the margin refiners earn producing aviation fuel from crude — have nearly tripled, hitting $75 per barrel. Airlines flying over alternate routes, burning more fuel on longer paths that avoid the Gulf, are passing costs to passengers and, more consequentially, to air freight rates on the perishables, medicines, and electronics that travel in cargo holds.

The Double Whammy

Pakistan did not wait long to reach for administrative rationing. Prime Minister Shehbaz Sharif announced a four-day working week for government employees in a televised address in early March, alongside school closures and mandatory remote-work rotations. "The entire region is currently in a state of war," Mr. Sharif said, according to Al Jazeera.

"The entire region is currently in a state of war"

The measures have done little to address the underlying problem.

"Transport dominates petroleum consumption," Mr. Durrani told the news station. "Roughly 80 percent of petroleum products are used in transport, meaning the country's oil dependence is fundamentally a mobility problem." Salary cuts for cabinet ministers, he added, affect public finances. They do not reduce how much fuel the country burns.

On the streets of Islamabad, the measures register as a tax on those least able to absorb it.

"There is no benefit to me if they work three days or five days a week," Sohail Ahmed, a 27-year-old delivery rider supporting a family of seven, said in an interview with Al Jazeera. "For me, the main concern is the fuel price because that increases the cost of every little thing," he said. "With this situation not ending any time soon, I don't have much to think about Eid."

Sri Lanka, which barely clawed back from its 2022 default, went further.

The government introduced a QR code-based fuel rationing system capping weekly purchases per vehicle and declared Wednesdays a mandatory non-working day for state employees. The Philippines, which imports 95 to 98 percent of its oil from the Persian Gulf and saw national oil stocks fall to 45 days from 57 within a month of the closure, declared a national emergency and moved civil servants to a four-day workweek.

Egypt is carrying fossil fuel subsidies that already consume 28 percent of government spending, with $4 billion in Eurobonds to roll over this year. The fiscal arithmetic of maintaining those subsidies while servicing dollar-denominated debt at rates that have risen since the war began does not favor Cairo.

Burned Out

Perhaps the least-anticipated consequence of the Hormuz closure is what it has done to liquefied petroleum gas — propane and butane, which are distinct from the liquefied natural gas used for power generation, and the fuels that heat homes and cook meals for billions of people who have no connection to a gas pipeline and cannot afford electric alternatives.

Before the war, the Middle East exported roughly 1.5 million barrels a day of liquefied petroleum gas onto world markets. That flow has collapsed to approximately 270,000 barrels a day, a reduction of 82 percent. The United States, a major exporter of the fuel from its Permian shale operations, has scrambled to fill the gap. American exports of the fuel have surged to 2.7 million barrels a day, a figure that now represents 69 percent of the world's entire seaborne supply, the International Energy Agency reported. That the United States could absorb this role at all reflects how completely the shale revolution has rewired global energy trade, and how little the infrastructure was designed for it.

The problem is distance and logistics.

That the United States could absorb this role at all reflects how completely the shale revolution has rewired global energy trade

Middle Eastern supplies reached India, Pakistan, Bangladesh, and East Africa on short voyages in large volumes. American supplies travel from Gulf Coast export terminals on voyages three to four times as long, aboard a fleet of very large gas carriers that cannot be conjured from nothing. Shipping costs have spiked. Delivery times have stretched. In the gap between what the Middle East used to supply and what American terminals can now ship, restaurant owners in Kochi have turned to firewood — paying profiteered prices for commercial cooking stoves that have jumped from 16,000 rupees to more than 80,000 rupees, according to Onmanorama.

The Food and Agriculture Organization's global food price index has risen about 4 percent since the war began, a relief compared with the food price explosion that accompanied the 2022 energy crisis. But that aggregate figure masks what is happening in the kitchens of the Global South, where the inability to cook cheaply is a poverty trap in its own right.

From Stagflation Fears to Broken Bonds

The damage has not stayed neatly contained within the developing world.

Europe moved first, and hard. Twenty governments cut energy taxes within weeks of the price spike. Germany's 10-year government bond yield has climbed above 3 percent. Among other reasons, the yield on British gilts hit 5 percent — its highest since 2008 — as investors priced in persistent inflation and questioned whether central banks could tighten into a supply shock without breaking something.

The Federal Reserve has held its benchmark rate at 3.5 to 3.75 percent, caught between inflation that is moving the wrong way and growth signals that are softening. Gasoline prices in the United States rose 18.9 percent year on year through March. The consumer price index reached 3.3 percent. The University of Michigan's consumer sentiment index fell to its lowest reading in more than 70 years. Americans are not cutting their work weeks. But the hours they spend driving have dropped, and the shopping patterns visible in retail sales data have shifted in ways familiar from 2022: necessities up, discretionary goods down.

The supply shock has also transformed the United States' role in global energy trade in ways without modern precedent. American crude and condensate exports averaged a record 5.2 million barrels a day in April, surging to a weekly peak of 6.44 million barrels a day toward month-end according to the agency, making the United States a net crude exporter for the first time in more than 50 years. The Permian Basin and the Gulf of Mexico have become, by default and by crisis, the swing producers that OPEC once aspired to be. OPEC itself is a shadow of its former role: the United Arab Emirates exited the cartel on May 1, and the OPEC+ alliance's collective spare capacity has fallen to a historic low of 170,000 barrels a day, the agency found, barely enough to cover a bad week at a single large field.

To help ease the supply crunch, the Trump administration granted temporary sanctions relief for stranded Russian crude, allowing the offloading of Russian oil to Indian refiners in mid-April. That relief was allowed to lapse on May 16 as domestic political pressure mounted in Congress over Moscow's revenues.

Across the industrial supply chain, an oil shock has become a materials shock. The Middle East's petrochemical industry, which feeds the global plastics and polymer supply chain, has ground to a halt along with the rest of Gulf production. More than 30 force majeure events have been declared in polyolefins — the resins that make food packaging, pipes, car parts, and medical equipment. Polypropylene prices are up 55 percent. The International Energy Agency has taken to calling it "the Resin Strait."

Schrödinger's Market

On April 7 — the day oil hit $144.68 per barrel, its highest price ever recorded — the S&P 500 fell sharply at the open, then recovered. The index finished April up 10 percent, its best monthly performance in years. The S&P 500 Information Technology Index rose 17 percent, its strongest monthly gain since 2002. By early May, the broad market had reached record highs.

The divergence has alarmed some of the people who watch energy markets most closely. Amrita Sen, founder and director of research at Energy Aspects, said in an interview on CNBC's "Squawk Box Europe" that the global economy could be "sleepwalking into potentially a pretty big recession." She called the rally a case of "extremely misplaced euphoria" among investors who, she argued, are dismissing the ongoing energy squeeze as a problem affecting mainly Asian economies. "If anything," Ms. Sen said, "we think oil should be higher and the equity market should be a lot, lot weaker."

The theory investors are running is that reserve releases will bridge the supply gap, that a diplomatic resolution to the Gulf conflict is coming, and that the technology sector's earnings are sufficiently uncorrelated to energy costs to justify current valuations.

Each of those propositions may be true.

The International Energy Agency, in its May Oil Market Report, noted that the 400-million-barrel coordinated release, with 164 million barrels deployed as of May 8, is buying time, while cautioning that it cannot substitute for the 14.4 million barrels a day of production that remain offline. The cumulative supply deficit is on track to reach 900 million barrels by September. After that, the strategic reserves of most participating countries will be materially depleted, and the calculus changes.

What the stock market appears to be pricing is a resolution. What it is not pricing is the possibility that the resolution does not come quickly. The 186 tankers sitting in the Gulf are held there not by a diplomatic impasse but by naval mines, and clearing a strategic waterway of that complexity takes time that no amount of optimism can compress.

What the stock market appears to be pricing is a resolution. What it is not pricing is the possibility that the resolution does not come quickly.

The University of Michigan's consumer sentiment index is at its lowest since the Eisenhower administration. The gap between that reading and an S&P 500 at record highs is not merely an academic curiosity. It is a bet, made by investors with enormous amounts of capital, that the people rationing fuel from Karachi to Colombo are experiencing a temporary inconvenience, not a structural break.

The Long Road Back

The International Energy Agency's base case is that some flow through the Strait eventually resumes: partial, hedged, insured at enormous premiums, but sufficient to begin refilling the global supply deficit that has grown since February.

The agency is also cataloging, with increasing seriousness, the ways in which this crisis will accelerate decisions that were coming anyway: solar installations across South and Southeast Asia, the economics of which have improved dramatically against a backdrop of $110 crude; battery storage projects in countries that can no longer trust their fuel import supply chains; a reassessment of refinery geography that had assumed the Gulf would always be open.

None of that helps Sohail Ahmed this week. He will get on his motorbike, deliver whatever parcels are waiting, and watch the fuel gauge. He has stopped planning for Eid.

"With this situation not ending any time soon," Mr. Ahmed said in an interview with Al Jazeera, "I don't have much to think about."

• The author is the Head of Research and Analysis for Icarus Asia, a Hong Kong-based risk and advisory business. He is a former journalist.