The Oil Market’s Worst Nightmare Is the Strait of Hormuz

Oil Could Hit $150: How the Iran Conflict Is Shaking the Global Economy

A global oil shock is not always caused by an exploding pipeline or an oil refinery on fire. Sometimes it is caused by a shipping lane that has become too risky to traverse.

That is the situation the world is in today. An oil price shock caused by the conflict in the Middle East and the resultant blockage of the Strait of Hormuz.

This is the critical chokepoint of the Middle East that carries about 20 million barrels per day of crude and refined oil products. That is about one quarter of the world’s total oil shipped by sea.

The Key Phrase Hook

The 20 million barrel bottleneck.

When that bottleneck gets tighter and tighter, the entire world feels it.

Since the conflict in Iran began in late February 2026, the International Energy Agency says the flow of oil through the Strait of Hormuz has been severely impeded. Export levels have dropped to less than 10 percent of pre conflict levels.

That is an unheard of situation in the oil world.

The International Energy Agency also announced that it will release its largest ever emergency stock release of 400 million barrels.

Oil prices are reacting violently to the situation. According to reporting from Reuters, the price of oil has already climbed above $100 per barrel as the attacks continue.

How high oil will go will depend on the duration and scope of the conflict. Prices could rise to $120 per barrel or even $150 per barrel if disruptions continue.

The chokepoint math

Let’s first look at the uncomfortable math.

In 2025, about 20 million barrels per day of crude and petroleum products passed through the Strait of Hormuz. That represented roughly 25 percent of global seaborne oil trade.

According to the U.S. Energy Information Administration, the average flow in 2024 was also about 20 million barrels per day, representing roughly 20 percent of global petroleum liquids consumption. There are very few alternatives if the route closes.

The second piece of information is where the oil goes.

According to analysis from UN Trade and Development, roughly 84 percent of crude and condensate shipped through the Strait in 2024 went to Asia. About 83 percent of liquefied natural gas shipments also went to Asia.

This means the immediate impact of the disruption will be felt in those markets first. However, oil is globally priced. Any disruption spreads quickly to the entire world.

What makes the situation especially volatile is that it is a physical risk, not just a price risk.

According to UN Trade and Development, ship transits through the Strait have nearly stopped. There has been a 97 percent decline in daily ship movements compared with the late February average.

The International Energy Agency warns that the consequences could be enormous.

According to the agency, the impact would be huge and physical shortages could arise rapidly if the disruption continues. There are limited alternative routes available for oil shipments.

Some alternatives exist, but they are limited.

According to the International Energy Agency, roughly 3.5 to 5.5 million barrels per day of pipeline capacity could reroute oil across the Arabian Peninsula.

The U.S. Energy Information Administration estimates that around 2.6 million barrels per day could potentially move through key bypass pipelines during a disruption.

Even at the highest estimates, this capacity represents only a small fraction of normal Strait traffic.

The routes to $120 to $150

Oil prices could reach $120 to $150 per barrel through several pathways.

These include physical supply loss, spare capacity becoming unavailable, and rising risk premiums in insurance, shipping, and stockpiling.

The current situation includes all of these elements.

According to the International Energy Agency, oil flows from the region have dropped to less than 10 percent of normal levels. This is forcing some operators to shut down production.

A major factor is the loss of the market’s safety valve, spare production capacity.

Much of the world’s spare oil capacity is located in the Gulf region. According to the International Energy Agency, a prolonged disruption would remove the vast majority of these spare supplies from global markets because they rely on the same export routes.

Even if production could increase, it may not be deliverable.

Shipping costs are also rising sharply.

Data from UN Trade and Development shows tanker freight costs have surged dramatically between late February and early March.

Higher freight costs feed directly into crude prices as refiners compete for barrels that do not require the risky route.

Possible scenarios that could push oil higher

Several plausible scenarios could drive oil prices into the $120 to $150 range.

Short disruption and rapid reopening

If maritime security improves and tanker traffic resumes quickly, the risk premium could disappear. Strategic reserves and inventories could bridge the gap temporarily.

Indicators to watch include normalization of tanker transits and falling war risk insurance premiums.

Prolonged partial closure

If tankers avoid the route for weeks, global supply shortages would emerge. Rerouting would only partially offset lost supply.

Key signals include persistent low ship traffic and sustained inventory drawdowns.

Escalation and production curtailments

If attacks force oil facilities to shut down, both supply and deliverability would decline.

Signals would include confirmed production shutdowns and operational halts.

Sanctions tightening

Expanded sanctions or self sanctioning by insurers and buyers could remove additional barrels from the market.

Indicators include sanctions announcements and widening price spreads.

Diesel driven refining pressure

If diesel shortages emerge, refiners may shift production to maximize diesel output.

Diesel shortages could push crude prices higher while increasing logistics costs across the global economy.

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What $120 oil means for the US economy

The United States consumes less Middle Eastern oil today than in previous decades. However, oil is priced globally, so higher prices still impact American consumers.

According to the U.S. Energy Information Administration, crude oil is the single largest factor influencing U.S. gasoline prices. Over the last decade it has represented slightly more than 50 percent of the retail gasoline price.

Energy represents 6.3 percent of the U.S. Consumer Price Index, while gasoline alone accounts for about 2.8 percent.

Large increases in fuel prices push inflation higher mechanically.

Analysis from the Federal Reserve of the 2022 oil price shock showed that a roughly $45 per barrel increase added nearly one percentage point to headline inflation.

A sustained move toward $120 oil increases the risk that inflation effects spread beyond energy into broader prices.

Energy price spikes behave like a tax.

Higher fuel prices shift spending away from discretionary purchases toward necessities. This effect is particularly strong when gasoline and diesel prices rise sharply.

According to the International Monetary Fund, a permanent 10 percent increase in oil prices can raise global inflation by about 0.4 percent while reducing global output by 0.1 to 0.2 percent.

For the Federal Reserve, a major oil shock creates a difficult policy tradeoff.

Inflation risks rise while economic growth slows. This combination could lead the Fed to delay interest rate cuts while monitoring inflation pressures.

The key factor will be duration.

A short disruption lasting a few weeks may be manageable. A six month shock affecting diesel, shipping, fertilizer, and food prices begins to resemble a stagflationary environment.

The diesel and logistics choke

If oil is the bloodstream of the world economy, diesel fuel is the energy source powering motion.

According to the U.S. Energy Information Administration, most diesel fuel is used in trucks, trains, ships, and heavy equipment that transport nearly every product people consume.

Diesel markets are typically tighter than crude oil markets.

The Energy Information Administration has warned that U.S. distillate inventories, including diesel and heating oil, were projected to reach multi year lows by the end of 2025 and 2026 due to high demand and refinery closures.

The International Energy Agency has also reported that middle distillate markets are particularly tight with low stock levels.

Meanwhile, UN Trade and Development reports freight rates and marine fuel costs have already increased significantly during the disruption.

The concern is not just higher fuel prices.

It is the possibility of transportation disruptions, delayed shipments, or sudden regional shortages of fuel.

In a globally synchronized supply chain, diesel shortages can quickly translate into higher trucking costs and product shortages.

History, timelines, and the policy playbook

Oil shocks follow a common pattern.

In the short term, neither producers nor consumers can adjust quickly. Prices adjust instead.

Several historical events illustrate how quickly geopolitics can move oil prices.

According to historical analysis from the Federal Reserve, oil prices nearly quadrupled during the 1973 to 1974 oil embargo, rising from $2.90 to $11.65 per barrel.

During the 1979 Iranian revolution, oil prices more than doubled between April 1979 and April 1980.

According to analysis from the U.S. Bureau of Labor Statistics, oil prices increased 155 percent between July and October 1990 during the Gulf War.

These precedents matter today because the International Energy Agency designed its emergency system specifically to address severe supply disruptions like the one currently unfolding in the Strait of Hormuz.

What policymakers can actually do

Strategic reserves can buy time but cannot reopen a shipping lane.

The International Energy Agency’s coordinated 400 million barrel release is designed to stabilize short term supply.

According to the U.S. Department of Energy, the Strategic Petroleum Reserve has an authorized capacity of 714 million barrels stored in underground caverns along the Gulf Coast.

Current inventory stands at about 416 million barrels.

The reserve can release up to 4.4 million barrels per day, and oil can reach markets about 13 days after a presidential decision.

Pipeline bypass routes exist but remain limited.

The International Energy Agency notes that bypass capacity is constrained and rerouting logistics have not been tested at maximum levels.

The U.S. Energy Information Administration similarly reports that few alternative options exist.

Demand reduction measures are politically difficult but powerful.

Emergency plans from the International Energy Agency include fuel switching, demand restraint strategies, and relaxed fuel specifications to increase supply flexibility.

The bottom line

If the Strait of Hormuz remains disrupted, oil prices may not need a perfect storm to reach $120 to $150 per barrel.

All that is required is for the Strait to remain a bottleneck.

A prolonged bottleneck in the world’s most important oil shipping lane is exactly the kind of disruption that can drive a serious global price spike.

According to the International Energy Agency, a prolonged disruption would make a significant price spike inevitable, and physical shortages could develop quickly.

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