Markets may be upbeat but that doesn’t mean the Gulf war’s impact is safely behind us

Ruchir Sharma, author of The Rise and Fall of Nations, identified retail investors as the engine pulling what might be called the perpetual bull market—now more than a decade-and-a-half old. “Americans are all in on the market, holding more wealth in stocks than their homes, for the first time,” he wrote in the Financial Times. “Retail’s share of daily trading in US stocks doubled in the last 15 years to 36%.”

The war plays out on TV screens that seems akin to a video game for most investors. And this is not just a US phenomenon. The Korean Kospi has seen a 27% gain over the past month, surging 5% on 4 May alone to an all-time high. Both Korea and the US will be primary beneficiaries if the gains from artificial intelligence (AI) measure up to the hype.

But in the meantime, fuel prices are surging and economies such as Korea and Taiwan are especially exposed.

The optimism bug extends even to central banks. Instead of raising interest rates in anticipation of higher prices, most have adopted a wait-and-see approach. The Bank of Japan, seeking to exit an era of easy money, had signalled a hike in April, but then elected not to raise rates partly because the Takaichi government prefers the status quo.

This creates a self-reinforcing loop that propels stocks higher because, as Sharma observes, “investors have come to believe the government will always bail them out.”

There is certainly some good news. First-quarter results in the US were much stronger than forecast. The world is much more energy-efficient than it was when oil shocks of the 1970s hit, in part because the pain is initially being felt inevitably across the developing world.

Writing in the Financial Times this week, Christof Rühl of the Center on Global Energy Policy at Columbia University made the point that we need 60% less oil for every $1,000 of global gross domestic product (GDP) at 2025 prices than we did in the 1970s. But, Rühl went on to warn: “Oil consumption today is more concentrated in high value uses and in areas where there is no substitute, like road or air freight and maritime shipping. These are (crucial) economic activities… once disrupted they are likely to cascade through the economy.”

The correct parallel this summer and next year may be the covid-style seizing up of supply chains, in slow-motion perhaps compared to the pandemic. Fifty years on, the great economic story of our age has been a shift in global supply chains to East Asia, but that miracle is vulnerable to a breakdown in oil supplies as well as helium because of the Strait of Hormuz blockade.

Of all things, helium is a key weak spot, circa 2026, in a way that would have been unimaginable during previous oil shocks. As the Asia Pacific Foundation of Canada observed in a recent update, “Helium is indispensable in chipmaking, used to prevent silicon wafers from overheating and flush out toxic chemical byproducts. The risk is especially acute for Taiwan and South Korea, which rely on Qatari supply.”

As for Qatar, which supplies almost 20% of the world’s liquefied natural gas (LNG) and was hit early in the war by Iranian strikes, no one could accuse its officials of over-optimism. They have warned it will take three to five years to get its LNG supply back to normal. We will all have to become skilled at cooking on an induction stove or with firewood.

Such candour is mostly in short supply. As The Economist observed in a bracingly realistic assessment in late March, “even the best-case scenario for energy markets is disastrous.” Reaching pre-war levels of production is a complex balancing act of restarting wells in a calibrated manner, “restoring pressure gently to avoid damaging reservoirs” and then ensuring that there are ships and insurers ready to get back into the business of transporting the oil.

“Insurers still writing cover have raised rates from 0.2-0.4% of vessel value to 1% or more, and 10% for the riskiest voyages,” The Economist reported at the end of March. The experts it quoted almost uniformly guesstimated that even if the war ended imminently, it would be several months before things approached normalcy.

Oil traders are warning that global stocks of crude oil, petrol, jet fuel and diesel will hit critically low levels by the end of this month. It is no longer a question of price alone, but whether there will be much physical supply at all as the blockades continue.

Almost 500 ships are estimated to be stranded near the Strait of Hormuz. Global airlines cut 2 million seats in supply for May and that will prove optimistic. Veteran aviation analyst John Strickland said this week, “I don’t think in my time there has ever been the question of shortages (of jet fuel).”

It is time, in India and overseas, that the discussion moved to fuel rationing, increased investment in solar energy and increased work-from-home schedules. Unlikely Asian countries have proved role models. Vietnam introduced jet fuel rationing from April. Sri Lanka moved to QR-code based fuel rationing within a fortnight of the war’s start.

Regardless of the buoyancy of stock markets, we have a summer and winter of prolonged shortages and discontent ahead. Governments and companies must act now.

The author is a former Financial Times foreign correspondent.