But the answer may be right in front of us: long-term structural volatility. The world has woken up to a new baseline of instability in the Middle East that won’t go away so long as the current regime in Iran remains and the country can control or simply block the Strait of Hormuz. And that instability is bound to create price volatility.
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Closing the Strait of Hormuz limits the ability of OPEC’s most important member states, like Saudi Arabia and the United Arab Emirates, to get their product to market. And it limits OPEC’s ability to stabilize prices. In short, we all need to prepare for persistent price volatility baked into the structure of the energy system, likely for years to come, even as the Strait of Hormuz reopens. Iran has shown that it can close the strait. The mere possibility of a closure is enough to generate volatility.
Of course, the context was different in previous periods of volatility. Hydrocarbon alternatives were limited and speculative until advances over the past decade. Today, the prospect of dramatic oil and gas price fluctuations may be enough to convince investors that there is a market for clean energy free of those swings. In my conversations in the last two weeks, I heard just that. Investors still don’t know exactly what’s to come, but they feel assured that alternative fuels and power sources have a path to market.
The ceasefire will need not just to hold but to turn into a durable solution. Otherwise the wakeup call is coming soon. Cooking fuel is already inaccessible in parts of Asia. Jet fuel is running low in Europe. Fuel prices are higher globally. Even though the U.S. has been somewhat insulated, the country will begin to send more hydrocarbon products to other markets, leaving costs to rise at home. At the spring meetings of the International Monetary Fund (IMF) and World Bank in Washington this week, the IMF warned of slowing growth and that “downside risks dominate” the economic outlook. “We've been sort of in la la land,” says McNally. “Well, la la land ends this month.”
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