How Fast Can the World Recover From a Hormuz Shock?

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1:45Javier Blas:Who's really happy is the market, because the market's gone up thousands of points over the last four or five days since hearing about it. And the strait is going to be opening. It's already partially opened. It's going to be opening up.

2:05I'm Stephanie Flanders, Head of Government and Economics at Bloomberg, and this is Trumponomics, the podcast that looks at the economic world of Donald Trump, how he's shaking up the global economy, and what on earth is going to happen next. Now, we're recording this in London on Wednesday the 17th of June. We don't know, may never know, the exact detail of the agreement between the US and Iran that we expect, famous last words, to be signed in Switzerland this coming Friday. But President Trump tells us the Hormuz Strait is going to be opening up. And for now, investors and those closest to the oil industry seem to believe him.

2:43But what does that mean from a practical standpoint? And why there seem to be such wildly differing views inside and outside the market on how long it will take for the oil market to, in some sense, get back to normal? I mean, depending on who you talk to, it's either going to take months to demine Strait of Hormuz, fix all those damaged refineries, or the whole thing could seem like a bad dream in a matter of weeks. I want to get to the bottom of that today, but I also want to step back to ask how this entire conflict since the end of February has changed the course of the global economy compared with what we might have been expecting on February 27th.

3:21And if we get time, I'd also like to ask whether the global oil market has also been changed for good. I noticed the UAE said today it was working on completely eliminating its reliance on the Strait of Hormuz over the next few years. Well, Javier Blas is absolutely the man to ask about all of that. And I'm glad to say he's on the line. Javier, thank you so much. My pleasure. Thank you for having me. You should remind people you're the Bloomberg Opinion, the Bloomberg Opinion columnist covering energy and commodities after years and years covering those markets as a reporter. And you're also the co-author of The World for Sale, Money, Power and the Traders Who Barter the Earth's Resources.

4:00But on the broader economic piece of the story, I'm glad to say we also have in the studio here in London, Jamie Rush, Director of Global Economics at Bloomberg and co-author of The Price of Money. He's worked before at the British Treasury, the New Zealand Treasury and the UK Office for Budget Responsibility. Jamie, thanks for joining. Pleasure. Normally, you're far too busy on all of our forecasts and our modelling and our cracked views on everything. So I'm glad I've been able to get you into the studio.

4:32Javier, tell us what you understand by the opening of the Hormuz Strait and what would that mean in the relative short term for oil prices and the oil market, generally oil supplies?

4:42Javier Blas:Let's call the reopening of the Strait of Hormuz the day that we see from the Persian Gulf region, so that is Saudi Arabia, the United Arab Emirates, Iraq, Kuwait, and Iran, plus Qatar, more or less the same amount of oil that we were seeing on February the 27th. And the reason that they are so diverging views is that never anything similar to what we are about to witness has been ever done. The oil industry needs to restart about, give it or take, 10 ,000 oil wells. We don't know whether those wells are going to come back into life with oil flowing. They're going to be dry. They're going to have problems.

5:28Javier Blas:We don't know if the pipelines are in good shape, what happens when you restart some of the machinery. What comes out of an oil well is not all oil is a bit of oil, a bit of water, a bit of gas and a bit of sand that needs to be separated. The industrial plants that do that separation have been shut down for 100 days. We don't know what happens when you restart then, you know, from the call. I sit on the optimist side, having spent some time in recent weeks talking to people who do a lot of maintenance in these oil fields in the Middle East. My kind of expectation is that 50 % of the production capacity comes back into what I call days.

6:12Javier Blas:Somewhere between five and 10 days, we get a significant chunk of production capacity coming back. I'm hedging myself, but say somewhere between three and six weeks, you get to 75%. Getting back the 100%, that's a bit more difficult. The final bit is going to take more time. I think that it takes perhaps months. Can it be that returning to 100 % takes more than a year? Yeah, that's possible. But in some ways, and excuse me to put it this way, I care very little about the last two percentage points of oil supplies coming back. Because two reasons. One, oil demand is weaker than we were in February the 27th.

6:54Javier Blas:So the market balance at a lower production level, and also because the rest of the world has moved on. You have American oil production scenes increasing significantly to an all-time high in May. You have Brazilian production up nearly 20 % year on year. So we do not need to go back exactly to where we were on February the 27th for the oil market to rebalance. So I think that on that debate of how long it takes, I am on the days and weeks rather than on the months and years. Okay, and it's interesting, there's various things embedded in that and in that sort of relatively optimism, which I notice relative to those who have sort of suggested it was all going to take a bunch longer.

7:40So there's a question mark about what happens when you reopen the production facilities, but the actual damage to those facilities, you know, the talk of, you know, years and years of repairs, you don't think that's going to be a significant issue?

7:53Javier Blas:No, the oil industry in the Middle East has suffered relatively little damage in the oil side from the war, what is on production facilities. There has been damage on what we call the downstream side of the industry. That's more the refining side, where some refineries are going to need significant repairs. And that's going to be measured more into probably the end of the year or the beginning of 2027. But what is the production facilities, or what we typically call in the oil industry, the upstream side, so that's the oil wells, the processing centers, the pipelines, etc., etc. There has been relatively very little damage.

8:34Javier Blas:Most of the damage that was sustained, particularly in Saudi Arabia and Kuwait, has been repaired. And this is also a very important question. I was asking a few weeks ago to someone who does a lot of work in the oil fields of the Middle East. And I said, what you guys have been doing? And they said, well, we have been working. The oil fields barring a few missiles here and there, but the oil fields were not a battleground. They were not a war fought over the oil fields. This is very different to Kuwait, 1990, 1991, or Libya during the civil war in 2011, where I was in the oil fields. and the different factions were fighting for the controls of those oil fields.

9:20Javier Blas:They were bombing the oil fields and the facilities were damaged in some occasions. This is a war that has not really affected the oil fields and maintenance has been taking place and engineers have been doing preventive work. So when the day comes that they can restart the wells, they can do it. I did notice our chief emerging market economist actually pointed out that in some ways, if you're thinking about what's the key constraint on oil while the strait's still closed, is it the sort of damage to the facilities or is it the strait itself? And he pointed out there's kind of been a natural experiment that the attacks have hit facilities on both sides of the strait, but the non-Humus sites have kept operating while the Humus activity fell.

10:03So the difference was clearly not about the attacks damaging the facilities. It was where their energy could actually get out. Before I get on to Jamie on the broader economics, I just want to sort of tick off a couple more things with you, Javier. The other things that people talk about, which again, embedded in your first answer, seem to be not compelling constraints. The demining of the strait, again, talk of that taking months and months. And also that it's not an issue for the sort of stability of the market and the pricing to have all of those reserves having been run down over the last few months.

10:37There's no expectation that all of these reserves have to be back up before prices start to come down.

10:43Javier Blas:No, I think that we will need to rebuild some of those inventories, certainly. If we look at demand for oil in 2027, we need to assume that it's not the oil barrels that we are going to consume or burn, but it's also the oil barrels that we are going to put aside and put back into strategic reserves. So the demand may be a bit higher than we think. One constraint is going to be the amount of vessels that they are available. We need to reposition all the oil tankers back into the Middle East, and some of those tankers are now at the wrong location because they are picking up crude oil, say, in the Gulf of Mexico for Japan rather than picking up crude oil in the Middle East, the Persian Gulf.

11:20Javier Blas:So you have to recall some of those vessels. And we are starting to see diversions on some vessels that were close to turn around Africa into going into the Atlantic. They are performing geotrons and they're going back to the Indian Ocean and heading back into the Middle East. So we are beginning to kind of reposition all the vessels. That takes a bit of time. These vessels, they move at not at the speed of a high-speed train or a car. I mean, they make about 25 kilometers per hour, give it or take. We put it in car terms. So it takes time to move them around. But there are about 60, 70 tankers already waiting in the Gulf of Oman, ready to go the moment that the strait opens.

12:00Javier Blas:I think that demining is a question. There are areas of the Strait of Hormuz that they are clear of mines, close to the Omani coast, close to the Iranian coast. So that is available. And I think that what we need is a proof of concept. The oil shipping industry, there are a number of ship owners who have a reputation for being, I think that the sympathetic term is more adventurous, the non-sympathetic term is more buccaneering, but they will be the first ones to cross the Strait of Hormuz. They will be the proof of concept that actually you can do it. And when they do it, we will start with a trickle, but the flood will follow very quickly.

12:38So Jamie, where is it that Bloomberg Economics thinks oil prices, or what are our kind of best guesses of how quickly the oil market can adjust and what that means for prices? Because obviously, it doesn't seem like we're going to get back to where we were before the conflict anytime soon, but it's still going to fall. Yeah, I mean, I suppose we're using similar rules of thumb to others. If you go into this, into the Iran conflict, what happened to oil prices when we lost the supply, well, that gives you a rough feel for what might happen to prices as they go down, right? If you use kind of these rules of thumb, they weren't a bad guide on the way in.

13:15Let's just imagine that you get 5 million barrels a day, which is very conveniently 5 % of global supply, an elasticity of 4. So if you lose 1 % of supply, prices go up by 4%. Well, that means you might get a drop in prices of around about 20%, which takes you from$90 down to 70 to 75. So I think that's the kind of range we'd expect oil prices to settle in if that's the kind of increase in supply that we see over the next month or so. I remember even a debate on this podcast where we had Ziad and Javier at the beginning of the conflict and very focused on the significance of the straighter form moves.

13:53And at that point, and I remember feeling that it maybe was on the low side, we had as our kind of dark downside scenario that the oil price would go to 110. And Javier and many others were saying, surely that the downside could be a lot higher than that. Despite the fact that the conflict has continued so much longer than people would have expected or hoped at that time, from an economic standpoint, why have they not gone as high as some thought? Well, punt it back to Javier and tell us why it's wrong. I mean, there are a couple of factors or a couple of things to think about. One is, as Javier sets out, that the adjustment that China has made to its imports of oil has been a big insulating factor.

14:33More broadly though, I think the oil market, its role in the global economy has changed immeasurably over the last 10, 15 years. If you go back to 2011, which is the last time we saw a sustained period of oil at$100 a barrel, well, two things have happened since then. We've seen the price of everything else has gone up by about 40 % relative to the price of oil. And the efficiency with which we use oil has gone up by about 25%. If you put these things together, well, to get an oil price shock of$100 a barrel now, or how it felt like in 2011, you'd actually need oil to move to$190 a barrel. So just those two factors alone explain part of the economy's resilience and also perhaps why the oil price itself hasn't jumped quite so much.

15:21And there's also this point about the demand destruction, but as the price goes up, you're getting reduced demand, which in turn prevents it from going higher and higher. But I should be fair to you, Javier, the really high end numbers that you talked about was if there were serious attacks on, for example, desalination plants, which clearly didn't happen. So I don't think you were making the sort of super high productions if that didn't happen. But it was certainly the case that a lot of people thought that prices would go higher than they have. And they've certainly been surprised at how long they've been under$100 in many cases, certainly in the last few weeks.

15:53So what's your explanation?

15:55Javier Blas:It's quite interesting because I was sanguine on where prices were going to go if, unless we have an open war and we started seeing Iran and his rivals target in the oil fields, which really never happened. The oil price surprised me to the downside still, which has been, I will have expected that prices will have been more sustained over$100. I think that Jamie allude to some of the factors, and there are a number of them, but you have to say, well, you can only name one, and only one will be again China. China surprised me because it reduced oil imports by tanker by about 45 % relative to pre-war level.

16:40Javier Blas:And we don't really know how that happened. I mean, we have our suspicions, lower demands on shifts on refineries, but we do think that some kind of inventory drawdown happened, whether that was commercial inventories or strategic inventories. You look at India was importing in May of 2026 exactly as much oil as it was importing in May or 2025. So the fact that China came down allowed a number of other economies in Asia to continue buying. I think that the use of the strategic petroleum reserves in the West, particularly the US and Japan, very early in the conflict was very important and a significant change of how we have used the SPR in the past.

17:22Javier Blas:I mean, you look at the conflict of Libya, kind of the previous time that we used the strategic petroleum reserves. It took about six months of civil war for the West to decide that it was the time to use the SPR. Similar situation in 1990, 1991 during the invasion of Kuwait. Here we use the SPR before the second week of the conflict have ended. So very, very different. And there are a number of other factors that I think that are important, but I'm going to name only two more. One, Stephanie, you alluded to it, demand destruction. We saw a significant amount of oil consumption just to disappear without really causing a lot of damage to the global economy.

18:04Javier Blas:Perhaps it's because we are having this narration from the West and we didn't suffer and this was more of a crisis that affected the number of economies in Southeast Asia, poorer economies, but people in Europe, in Japan, and certainly in the US and Canada, didn't have to change the day-to-day way of living, driving, flying around, nothing changed. So that was very interesting how demand came down without affecting those economies. And the other one is the fact that the Strait of Hormuz was never really truly closed. There were two big pipelines that provide bypass routes around the Strait of Hormuz, one through Saudi Arabia, the other one through the United Arab Emirates.

18:45Javier Blas:And also towards the very end of the crisis, and let's hope that this is the very end of the crisis, we saw what started as a trickle one or two oil tankers a week crossing the Strait of Hormuz, what we call dark mode. So the location beacon off at night, very close to the coast, closer to the coast. Typically you see these big vessels that are about 330 meters long. And that started like one or two a week. And very quickly by last week, it was one or two or even three a day. And that make a big difference because you only need five or six a day. and you are pre-war levels. When people say, oh, you know, before the war, about 60 vessels were crossing the Strait of Hormuz every day, that really includes every kind of vessel, from the big oil tankers to a small fishing trawler.

19:43Javier Blas:For the big tankers, we need about seven a day, big oil tankers to cross the Strait of Hormuz, and we are at pre-war export levels. So that's also important to remember. It's funny because we've been focused on this issue for so long, and there's still things that I haven't heard before. So the maths go as basically, you need about 15 million barrels a day of crude oil exports to go back to pre-war level through the Strait of Hormuz. Each of what we call a BLCC, very large crude carrier, is 2 million barrels thereabouts. So it's about seven, seven and a bit tankers gives you there. And if you consider that probably we are going to still see those bypass pipelines working, Actually, probably we only need to cross through proper Estrella del Hormuz about 10 million barrels, which is five vessels a day.

20:36Javier Blas:It is not a huge number. Even if you have to basically zigzag among the mines, it's only five tankers a day. It is not 50, 60, 100 vessels a day. I love that VLCC, this very large container. I'm just going to start referring to that with people who you have your VLC, you have your very large car.

21:07Jamie, Javier mentioned about the sort of relatively muted impact on activity, certainly in the more advanced economies. So I guess that sort of takes us to this kind of second piece of just, okay, assuming that this is some kind of turning point, some kind of reopening point, thinking about what path the global economy is on now relative to what we would have expected in mid-February or even the beginning of the year. How has this conflict changed the world from an economic standpoint? Well, I think we take a step back and look at kind of economic outlook over the past year as it looks at each point.

21:47So let's think about the impact of tariffs, the uncertainty that caused and the impact it had on the economy. Well, the economy was in a pretty much global slowdown in 2025. As we got towards the end of 2025, though, things were really changing. Uncertainty basically disappeared. We knew what Trump's endgame was, roughly, with tariffs. And the economy was starting to really recover. You saw that in advanced economies. You saw it in developing economies. And, of course, you had the AI boom sort of supercharging all of that. So things were really looking up at the start of the year. On February the 27th, the global economy looked great.

22:20And it doesn't look like that now. So if we've got a global GDP tracker, which kind of uses machine learning methods to combine lots and lots of information, soft information, which is kind of very, very timely. And you can see that immediately after the straight shut, the global economy started to slow down. There are a few reasons why that's the case, right? One is that there's the direct effect of oil prices being higher, squeezing consumers, making it harder for them to buy stuff. That's the direct effect. Then you have the uncertainty. How long is this going to last? Are oil prices going to go up by more?

22:50am I going to be able to fly somewhere? These things all affect people's decision making and then finally you've got tighter financial conditions because central banks are waking up to the risk that inflation will be higher, they're not cutting or they're indeed hiking and this of course is making it harder for businesses to invest, it's making it more costly, it's making it more costly to borrow. So all of these things are coming together to act as a drag on the economy and the question is how fast are all these things going to go away? The deal is signed, maybe the straight opens straight away.