Kevin Book on Oil Markets, Hormuz Risk, Price Shock

Summary

• A closure of the Strait of Hormuz has global price implications, even though ~80% of its crude traffic goes to Asia, due to the integrated nature of the oil market.
• Even if the conflict ended immediately, the supply disruption is not "short"; restarting shuttered oil fields and facilities gracefully could take up to six months.
• Modeling suggests a prolonged Strait closure could push crude prices to a range of $100 to $174 per barrel, essentially doubling the pre-war price on a crude content basis.
• Such a crude price shock would translate to a national average gasoline price nearing a "$6 handle," up from the current $3.91/gallon average.
• The Biden administration has stated it is not currently planning to block U.S. crude or product exports but might reconsider if prices rise attractively (e.g., towards the high end of the modeled range).
• Policy intervention (e.g., export blocks, price controls) tends to intensify as prices rise, though clear legal authority for some measures is currently lacking.
• Market sentiment is darkening as the crisis extends beyond initial "short-lived" expectations, with talk of ground troop deployments and a closure lasting weeks or months.
• The process for reopening the Strait of Hormuz itself would not be instantaneous, adding another layer of delay and uncertainty to supply normalization.
• Predicting oil prices is acknowledged as difficult, especially during a war, making the high-end price scenario a risk rather than a forecast.