War in the Strait of Hormuz Set to Permanently Damage Oil Demand

The recent surge of crude oil prices above $100 per barrel has some analysts predicting a 'new normal' of prolonged disruption in the Strait of Hormuz, which could lead to a long and damaging war that permanently alters global oil demand.

According to S&P Global Energy, Middle Eastern crude oil production is unlikely to return to pre-war levels by the end of 2027. While this would normally be expected to drive up prices, some experts argue that the market's response may be more complex than initially thought.

Citing a report from former White House official Bob McNally, analysts note that oil prices tend to swing widely due to inelastic demand. In other words, people don't necessarily change their behavior even when prices rise slightly, but high enough prices can make them stop buying fuel altogether.

However, the current situation may be different, as the proliferation of alternative energy sources has reduced consumers' and businesses' tolerance for pricey oil products. JP Morgan's Natasha Kaneva notes that since the war started, oil demand has been about 5 million barrels per day below last year's levels, and predicts that next year it will fall to its lowest point since 2019.