Guillaume de Sardes: By attacking Iran on February 28, the United States and Israel embarked on what increasingly appears to be a hazardous undertaking. Not only did the swift victory they had hoped for fail to materialise, but Iran is now mounting military resistance against the coalition formed by these two countries. It is now using the partial closure of the Strait of Hormuz — through which 20% of the world’s oil (some 20 million barrels per day) and 25% of global LNG normally transit — as a strategic lever. Bypass options do exist via the Saudi East–West Pipeline (towards the Red Sea) and the Emirati pipeline to Fujairah, but with a combined capacity of approximately 5 million barrels per day. A small number of tankers are still making it through the strait (1 million barrels per day). The uncompensated deficit therefore currently stands at approximately 14 million barrels per day — roughly 14% of global consumption.
In the face of this shock, the available levers are limited. Additional production that could be mobilised in the short term is estimated at a maximum of 2 million barrels per day. Drawing on global strategic reserves — approximately 400 million barrels — would make it possible to inject an additional 3 to 4 million barrels per day, but only for a necessarily limited period. Total available substitution is therefore at best 6 million barrels per day, which is insufficient to offset the supply shock. A price increase is therefore inevitable in order to rebalance the market through demand compression. How high could the price per barrel go?
Dejan Šoškić: It’s difficult to say at this point. If we look at previous episodes of high oil prices (2008 and 2022), in both cases we didn’t have a physical decline in global production and transportation capacities. This time around, it isn’t the case. Both, transportation capacities, and production infrastructure is being disrupted, and for a prolonged time frame ahead. At the same time, overall level of potential decrease in production, storage, and transportation is far from being well known, and can be substantially affected by the path this ongoing conflict will take in the following weeks and months. However, since demand for energy falls in the category of goods with so-called inelastic demand, the price effect may be disproportional to the change in supply. Therefore, it should not be a surprise if the price of oil and gas go beyond the levels of 2022 and 2008 and for a prolonged period of time ahead.
What will be the short-term effects of this price increase on the global economy? Are these negative effects still avoidable? Which countries will be most affected?
Short term effect will naturally be in cost push inflation. Cost of energy will directly find its way into increasing CPIs (inflation), but will also have secondary effects on increasing prices of other goods and services through increased costs of transport and energy used for production. Besides, potential shortage of fertilizers that were produced in the Gulf, may come back in the form of rising food prices with additional direct impact on CPIs (inflation). Increased costs of living may push wages up, as another cost push element that can influence inflation. Since a standard monetary response on these supply shocks is to raise interest rates to subdue secondary and tertiary effects on inflation, higher interest rates will suppress economic growth, and may lead to wide spread stagnation and recession. Countries of Europe may be globally among the hardest hit by these negative effects. It is too late for negative effects not to occur, but if the conflict would end soon, negative effects would be less severe, although probably lasting for several years.
We still seem to be far from any resolution of the conflict. If it were to last several more months, what would the consequences be for the global economy, given that energy use is extremely closely correlated with economic output (with a correlation coefficient above 0.95)?
Global recession with stagflation characteristics would be unavoidable in my opinion. In those circumstances, traditional economic policy response, to a large extent, does not work.
In this precarious context for the European economy, the Prime Minister of Belgium, Mr. Bart De Wever, declared on March 14, 2026, in an interview with the Belgian daily L’Écho : “We must normalise relations with Russia and regain access to cheap energy.” This position is, however, far from commanding consensus. Do you think that the European Union, in the event of a serious economic crisis, might nonetheless seek to reconnect to Russian gas? Do you think the Kremlin would agree, given that on March 4, Vladimir Putin suggested that, rather than endure the European embargo (end of gas purchases by end of 2027), Russia could redirect these volumes to other, more profitable markets right now?
European economy has to have comparably cheap energy (similar to the cost of energy in the US and China) to have a chance in trying to preserve and potentially improve its competitiveness on the global market. Without relatively cheap energy for the EU, it is hard for me to imagine another scenario than low and/or negative growth with ongoing deindustrialization. An idea for a diplomatic initiative for peace and security in Europe, as the one that has led to creation of OSCE, might be worth revisiting.
