THE ECONOMIST: Ceasefire will not bring peace to world energy markets

Throughout the war in Iran most investors have bet that an economic catastrophe would not take place.

Oil and gas prices would need to rise to the stratosphere to destroy demand for the fuel that flows through the Strait of Hormuz. That would cause recession and high inflation.

So commodities prices rose to painful, rather than disastrous, levels. The planned reopening of the strait seems to have justified the optimism. As we published this, stocks and bonds alike had rallied.

The S&P 500 index of stocks sat only about 3 per cent beneath its all-time high, reached in late January.

If the ceasefire fails the rally would be reversed and then some, because investors would have to price in a war that is resistant to peacemaking.

If it holds, recession will be avoided, but commodities markets will still feel the effects of the war for months to come.

Gulf countries have cut their output of crude by 10 million barrels per day, or 10 per cent of global supply.

It will take time to restart infrastructure and get it going full pelt, and to move tankers to the right places.

Insuring cargoes could be pricey, and Iran may try to impose new tolls, creating uncertainty even if it fails. There is likely to be a lasting risk premium in oil prices, reflecting the chance of renewed fighting.

This lasting disruption explains why, if futures prices are to be believed, the price of a barrel of Brent crude will end the year at around $75, about a quarter higher than was expected at the start of 2026.

Similar hangovers will be felt in other commodities markets. Gas infrastructure is even harder to get going than oil wells.

Qatar’s Ras Laffan export facility lost 17 per cent of its capacity in a drone attack and will take years to repair.

A shortage of fertiliser, for which the Gulf is also a crucial supplier, has already disrupted the planting season in the northern hemisphere and parts of Africa.

That will reduce the supply of food and worsen global hunger. Supply chains for petrochemicals, helium and aluminium will also take time to recover.

The combined economic effect will be to dent global growth and to raise inflation materially.

Central banks will keep interest rates modestly higher than they might have been; returns for investors will be lower.

Businesses will worry even more about the security of supply chains. They have faced one shock after another, including COVID, Russia’s invasion of Ukraine and American tariffs.

Nobody can now deny the necessity of hedging against political risk, pandemics and wars. But the need to consider such factors deters investment and acts as a creeping tax on global economic activity.

All of which sits uneasily with buoyant financial markets. True, the resilience of the “Teflon economy” shows the adaptive power of markets in the face of disruption — and the discipline that the threat of catastrophe exerts on the likes of Donald Trump.

Yet disasters cannot always be dodged and the list of tail risks is long. It includes a Chinese invasion of Taiwan and an artificial-intelligence crisis.

With energy, there is at least a silver lining to a supply-chain rethink. It never made sense for global prosperity to depend so much on a single waterway in the Gulf. Slowing climate change requires burning less fossil fuel.

The need to diversify away from the Middle East will encourage more renewables capacity and a hunt for new sources of natural gas.

The fracking revolution of the 2010s, from which America has benefited hugely, is an example of adaptation.

The technology had its roots in the 1970s oil shocks, which also encouraged investment in nuclear power in France and the exploitation of North Sea oil by Britain and Norway.

The advantages of having a secure and plentiful energy supply are once again being made plain.

The best case for the world is that the economy will dodge a 1970s-style slump — while policymakers learn 1970s-style lessons.