McKinsey: Global Energy Shock Absorbers Are Wearing Thin
Global energy markets absorbed the largest supply disruption in modern history this year, but a newly released McKinsey & Company report warns that the infrastructure shielding the global economy from a 1970s-style recession is rapidly deteriorating.
The on-and-off closure of the Strait of Hormuz disrupted 14 percent of the global combined oil and gas supply at its peak, an impact more than double the relative size of the 1973 Arab oil embargo and over six times the peak impact of Russia’s 2022 invasion of Ukraine.
Despite the economic shock, global growth remained positive and crude prices eventually retreated from a peak above US$120 per barrel. The McKinsey report attributes this unexpected resilience to a combination of factors, but warned that the economic cushions are only getting thinner.
Bridging the immediate supply gap
Prior to the crisis, approximately 21 million barrels per day of oil flowed through the Strait. When the waterway closed, markets faced an immediate supply-demand gap of 15.5 million barrels per day.
The global system closed this gap through a massive rewiring of trade. Saudi Arabia’s East-West pipeline and the United Arab Emirates’ ADNOC pipeline to Fujairah ran at maximum capacity, effectively offsetting 35 percent of the missing barrels.
Furthermore, inventory drawdowns absorbed another 20 percent of the shock. The US led a coordinated International Energy Agency (IEA) release by tapping its Strategic Petroleum Reserve, while China leveraged its own massive stockpiles.
However, McKinsey notes that demand destruction and flexibility eventually accounted for the largest share of the adjustment, neutralizing 45 percent of the gap.
Chinese refiners prioritized transport fuels and substituted missing naphtha with imported American ethane and domestic coal-to-chemicals conversions that triggered a 40 percent drop in Chinese seaborne crude and refined product imports.
While the immediate crisis was contained, the shock absorbers that prevented an economic catastrophe are dissapating. By late August, the global economy had drawn down half a billion barrels from inventories.
The US Strategic Petroleum Reserve now sits below 300 million barrels, approaching its statutory floor, while the most significant remaining crude stockpiles remain locked in China.
Infrastructure as insurance
Structural strain has also caused gulf refineries to cut output by more than one-quarter due to regional disruptions and physical damage, while approximately two million barrels per day of Russian refining capacity remain offline.
Meanwhile, global product inventories for critical fuels like diesel and jet fuel are currently hitting five-year minimums in both the US and Europe.
In response to the crisis, governments and corporations are actively fortifying energy security. The report estimates that measures currently…
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