The oil industry's boom-bust cycle is self-perpetuating. Low prices cause companies to slash investment and lead to a talent drain as workers leave the volatile sector. This underinvestment, combined with natural production declines, inevitably leads to tighter markets and price spikes years later.

A dangerous disconnect exists between oil futures prices, which seem muted, and the physical market. Experts warn of a catastrophic global supply shortage if the Strait of Hormuz remains closed, highlighting a significant tail risk that financial markets are currently underpricing.

Artificially suppressing oil prices or keeping them in a manipulated range prevents producers from investing in new production, evidenced by flat rig counts. This lack of a supply response ensures the underlying scarcity problem worsens, leading to structurally higher prices over time.

An energy crisis has two key factors: the size of the disruption and its length. Market buffers like strategic reserves can cushion the initial shock, but a prolonged crisis exhausts these buffers and leads to extreme price increases, which haven't happened yet.

The key variable in the current oil crisis is its duration. Because the supply shock is expected to last for quarters, not just months, the long-term drag on economic activity becomes a greater concern for markets than the initial spike in inflation, changing the calculus for policymakers.

The impact of an oil supply disruption on price is a convex function of its duration. A short-term closure results in delayed deliveries with minimal price effect, while a prolonged one exhausts storage and requires triple-digit prices to force demand destruction and rebalance the market.

The Iran conflict has revealed the vulnerability of the Strait of Hormuz. Even after the strait reopens, oil prices are unlikely to return to pre-conflict levels. A new, persistent risk premium of up to $20/barrel will be priced in to reflect this ongoing geopolitical threat.

The economic impact of high energy prices is manageable and relatively linear. However, a physical shortage of oil and gas, where supply is simply unavailable, would create a non-linear, catastrophic shock for Asian economies heavily reliant on Middle Eastern imports.

A prolonged blockade of the Strait of Hormuz would remove up to 16 million barrels of oil per day. This scale is so massive that government strategic reserves are inadequate to fill the gap. The only mechanism to rebalance the market would be catastrophic demand destruction.