After the deluge, get ready for a reset

Now that Iran has confirmed the likelihood of a deal with the US to stop the conflict, we can seriously look at a post-war scenario. The oil market will take a while to reach its pre-war equilibrium after the Strait of Hormuz reopens once the deal is signed in Geneva on Friday. The new equilibrium will be based on fundamental shifts in oil consumption and production. Oil-importing economies will seek energy resilience in renewables. Oil trade will fragment, with countries moving into preferred regional corridors. There will be irreversible changes to risk premiums in the oil shipping business, and higher transport costs will speed up energy transition. Fragmentation will distance oil trade from the petrodollar system, which affects the US' ability to run large fiscal and trade deficits.

There will be knock-on effects of a permanent reset on manufacturing and agriculture. Factory output must secure resilience to energy disruption, and this weighs in favour of protected markets. De-globalisation of farm input supply chains could fragment the food market. Services like transportation will take time to recover from demand destruction. Behavioural changes brought on by successive oil shocks can change work and leisure preferences. These adjustments will play out over the long term. Some of their effects could be masked by the global economy refilling its strategic oil reserves in the immediate future.

The world is expected to hit peak oil demand between 2030 and 2050. The US-Israel war on Iran will have trimmed these estimates. Natural gas will be the transition fuel until adequate investment is made in electricity from RE. Synthetic hydrocarbons should gain prominence in long-haul transport. Oil will switch from powering autos and machinery to producing plastics. Producers risk stranding new wells and high-cost refineries due to demand shifts. Some degree of disinvestment is inescapable. Global power dynamics should swivel away from fossil fuels to rare earths, even if West Asia builds bigger strategic cushions once Hormuz reopens.