Strait of Hormuz handles 20% of global oil as IMF warns cushion shrinks

The global economy enters the latest Strait of Hormuz crisis with less capacity to absorb an oil supply shock than in prior episodes, the International Monetary Fund warned.

The IMF said the global economy has reduced cushion against a disruption to energy supplies through the Strait of Hormuz, as the US launched a third night of attacks on Iranian positions in the waterway that handles about 20% of the world's oil.

"The cushion that protected economies during past oil shocks has eroded as fiscal space narrowed and central bank balance sheets remain bloated," said Nouriel Roubini, professor emeritus of economics at New York University's Stern School of Business.

Tanker traffic through the Strait of Hormuz has fallen sharply in recent days, with some vessels delaying voyages or avoiding the route because of security concerns, according to shipping data. The International Energy Agency said refining margins have climbed to their highest level in four years as fuel supplies struggle to keep up with demand, while diesel markets appear especially vulnerable given already stretched global processing capacity.

A prolonged disruption could push oil prices 30% higher, the IEA estimated, reigniting inflation pressures in energy-importing economies and complicating central bank policy decisions. Unlike the 1970s oil shocks that triggered a decade of stagflation, the current episode unfolds alongside an AI-driven investment boom that has supported growth, though the IMF warned that tail risks are larger than what financial markets currently price in.

Historical Precedent Suggests Milder Impact, but Risks Are Rising

The weaponization of oil has a long history. Germany lost World War I partly because an Allied sea blockade deprived it of oil, and Imperial Japan attacked Pearl Harbor after the US imposed an oil embargo. More recently, the 1990 Iraqi invasion of Kuwait, the 2000-01 oil price shock, and last year's 12-day war against Iran all produced much milder economic effects than the 1970s crises, Roubini noted.

Several structural changes explain this pattern. OPEC producers realized that weaponizing oil can be counterproductive — a shock large enough to cause global stagflation eventually leads to a collapse in demand and prices, as happened in 1981-82. Energy-efficiency gains have reduced the share of imported oil in production and consumption since the 1970s. Major consumers including the US, Europe, China and Japan built strategic petroleum reserves that can be released when prices spike.

Refining Bottlenecks Add a New Layer of Risk

The current crisis differs from past episodes because the bottleneck is no longer just crude supply — it is the ability to turn crude into usable fuels. Attacks on refineries and fuel storage sites in the Middle East, coupled with earlier disruptions to Russian refining facilities, have reduced global processing capacity at a time when demand remains strong.

Diesel markets are under particular strain. Diesel powers trucks, cargo ships, construction equipment and agricultural machinery, meaning higher diesel prices quickly feed through to transport costs across supply chains. The IEA said crude exports recovered in June after shipping resumed, but renewed fighting this month has again clouded the outlook.

If the latest skirmishes lead to a full escalation of hostilities, the economic consequences could be more serious, with a protracted conflict raising the risk of a truly stagflationary outcome. The IMF's warning suggests that even if the immediate crisis is contained, the structural erosion of the global economy's shock-absorption capacity leaves it more vulnerable to the next disruption.

This article is for informational purposes only and does not constitute investment advice.