- The Strait of Hormuz closure is the largest oil supply disruption in history (IEA), but it’s not just about oil. It has simultaneously knocked out roughly 20% of global LNG, more than 30% of seaborne fertilizer, half the world’s traded sulfur, and a significant share of global helium used in chip manufacturing as well as urea, ammonia and other elements that feed into food supply chains. Standard growth models understate the damage because they miss these parallel supply chains.
- Demand destruction—the process by which high prices force consumers and businesses to cut spending—unfolds through seven distinct channels on different timescales. Under conditions like those coalescing it can result in a permanent decline in demand for a good or service following a price shock because of an extended increase in supply constraints, prices or both that consumers substitute other alternatives or stop purchasing such items for good. In this case demand destruction works though several channels: The fast channels (gasoline costs, consumer confidence) hit within weeks. The slow channels (business investment, Federal Reserve policy, food inflation, semiconductor shortages) activate with modest lags. A crisis that persists long enough, where all seven operate simultaneously, compound and reinforce one another, risks introducing a large negative feedback loop into the American economy.
- Peak of demand destruction depends entirely on how long the Strait of Hormuz stays closed. In a quick resolution (reopens by June), the damage peaks around April–May 2026 and fades by late summer. In an extended disruption (through September), it peaks around August and lingers into early 2027. In a prolonged crisis (three or more quarters), demand destruction peaks around October-November 2026, with the full recovery not arriving until the second half of 2027—because infrastructure damage to fertilizer plants, oil production, gas facilities and refineries takes years to repair.
Time is not an ally of the American economy.
In real time one can observe price signals because of the oil and energy shock that imply demand destruction has started. To be sure, among down market households in the U.S. and among emerging market economies as well as those with limited supplies to cover basic energy imports, demand destruction has already started.
Should the war in the Middle East continue and escalate from one that is about constraints in the transportation of energy supply and turn into a significant destruction of productive energy capacity, then a possible permanent destruction in demand that causes long-term structural change will start among upscale consumers and large systemic important economies.
The Strait of Hormuz has been effectively shut since early March, cutting off roughly 20% of the world’s oil supply. The International Energy Agency calls it the largest supply disruption in the history of the global oil market. Oil prices have spiked. Gas prices are climbing. Inflation fears are back. But all of that is just the opening act.
The bigger risk is what comes next: demand destruction. That’s the economic term for what happens when high prices force people and businesses to spend less. It sounds abstract, but it’s very concrete—it means fewer cars sold, fewer homes bought, fewer restaurant meals, fewer business investments, and eventually fewer jobs. And because the Strait of Hormuz crisis isn’t just about oil, the demand destruction this time could reach further than any standard model would predict.
We then focus on mapping the channels through which demand destruction propagates, the sequence in which they activate, and how they compound over time. The goal is to help business leaders and policymakers understand what to expect and when—not to predict exactly how much.
Complex ecosystem of risk
Most people think of the Strait of Hormuz as an oil chokepoint. It is—but it’s also a highway for a lot of other critical materials. According to the IEA, the strait carries about 20% of the world’s traded natural gas, more than 30% of global fertilizer shipments, roughly half the world’s seaborne sulfur (a basic ingredient in everything from mining to rubber to pharmaceuticals), and a big chunk of global helium.
That last one matters more than you might think: Helium is essential for manufacturing the advanced chips that power everything from smartphones to AI data centers. There’s no substitute for it. When Hormuz shut down, all of these supply lines went dark at once.
This is at once a risk to the real economy as well as global and American financial markets overexposed to technology and artificial intelligence-dependent valuations.
That combination has no historical precedent.
Seven channels of behavior
Demand destruction channels: timing, magnitude, and evidence.
How demand destruction works
First, when oil prices spike, it acts like a tax on every household and business in the country. Americans collectively spend hundreds of billions of dollars more per year on gasoline and energy—and that’s money they’re not spending on other things. Economists call this the “purchasing power drain.” But the damage doesn’t stop there. It triggers a chain reaction.
Second, confidence falls. People see gas prices rising, hear bad news about the economy, and start to worry. They cut back on discretionary spending—dining out, travel, shopping. Historically, consumer confidence has dropped 20% to 30% within two to three months of every major oil shock.
Then, big purchases freeze. Cars and homes are the most sensitive categories. When people are worried about the economy and paying more for gas, they put off buying a new vehicle or signing a mortgage. Hamilton (2009) showed that falling auto sales were a significant cause of the 2008 recession, separate from the financial crisis.
Next, businesses feel the squeeze. Diesel above $5 per gallon raises the cost of shipping everything. Companies respond by delaying investments, freezing hiring and eventually cutting staff—especially in transportation, manufacturing and agriculture.
Then the Fed gets involved. If oil-driven inflation forces the Federal Reserve to raise interest rates—or even just to hold them higher for longer—it makes borrowing more expensive for everyone, deepening the slowdown. But if the Fed does nothing, inflation could spiral. This is the classic stagflation dilemma, and there’s no clean answer. If the situation becomes more severe, the Fed will act. But we think more likely than not that the Fed remains patient, and when it does act it will be behind the curve, adding further pressure on demand before cutting aggressively.
Finally, if prices stay high long enough, people change their behavior permanently. They buy electric vehicles, lock in work-from-home arrangements, invest in energy efficiency. After the 1979 oil shock, U.S. oil consumption took nearly a decade to return to pre-crisis levels. This kind of demand destruction doesn’t reverse when prices come back down.
On top of all this, the commodity channels—food prices rising because fertilizer is scarce, chip production slowing because helium is unavailable, industrial costs climbing because sulfur and natural gas are disrupted—add another layer of pressure that standard oil-GDP models completely miss. These channels also have the longest tail: Even after shipping through the Strait of Hormuz resumes, the physical damage to gas plants, refineries and fertilizer facilities takes months or years to repair.
Three paths from here
Everything depends on how long the strait stays closed. Each scenario produces a different peak of demand destruction—the point at which the accumulated pressure on the economy is most intense—and a different recovery timeline.
Why timing matters
In a quick resolution, demand destruction peaks early and fades fast—only the fast channels have time to fire. In a prolonged crisis, the peak doesn’t arrive until October or November because slower channels keep piling on: By then, consumers have pulled back, auto sales have dropped, businesses are cutting investment, the Fed is stuck and food prices are rising from fertilizer shortages.
All seven channels are firing and reinforcing one another. That compounding is what separates a painful quarter from a potential recession. And even after the strait reopens, the damage doesn’t instantly reverse—oil prices take months to normalize, while physical damage to Gulf gas plants, refineries and fertilizer facilities could take three to five years to fully repair, keeping food prices and industrial costs elevated well into 2027.
There is a real buffer. The U.S. economy uses about half as much energy per dollar of GDP as it did in 1980. Electric vehicles are growing fast. Work-from-home reduces commuting exposure. Inflation expectations are better anchored than in the 1970s. And the U.S. is now a net oil producer, which means some of the money spent on expensive oil stays in the domestic economy rather than flowing overseas.
But none of these buffers have ever been tested against a disruption this large, hitting this many commodities at once. If the strait stays closed past the summer, the probability of a recession would most likely be higher than 50%.
Defer no time; delay has dangerous ends
While the U.S. is a large economy that can absorb significant shocks it too has its limits.
Recent moves across domestic financial markets sending yields higher, equity valuations lower as well as rising commodity prices will all feed into the American real economy that can be observed in real-time price signals.
Those signals then alter fundamental consumer behavior as households adjust to an increase in the cost of living and businesses make pricing decisions as well as pull back on investment and hiring decisions as the cost of business rises.
For now, we think that understanding the channels through which demand destruction operates is more important than estimating the economic deadweight caused by it.
Should the conflict continue, there will be sufficient time for that.
Policymakers need to make use of the time conferred upon them because of the size of the American economy and its ability to absorb large shocks.
If they let that advantage slip, we will be talking about long-term structural damage to global energy capacity and fundamental long-term change to the U.S. economy.
