While the global energy market has proven ‘surprisingly resilient’ following the crisis in the Strait of Hormuz, the buffers that absorbed the shock are increasingly under pressure, a new report by the McKinsey Global Institute has suggested.
According to the report, Aftershocks: Energy security beyond the Strait of Hormuz crisis, while the Strait of Hormuz is the latest – and largest – supply chain disruption the global energy market has faced, it will not be the last, necessitating the need for governments and the business sector to strengthen energy security.
‘Reshaping the business case’
‘Energy security concerns are reshaping the business case for resilience,’ the report noted. ‘While measures require investment, they also can cut costs over time, enable business continuity, and drive growth. Decision makers should map their exposure across fuels, assets, and routes – and act on it, from improving energy efficiency to building flexibility in inputs, suppliers, and logistics.’
The report notes that the response to the Hormuz crisis to date has focused on existing inventories, temporary buffers and changes in trade flows – China, for example, has curtailed imports of oil, while the US has increased its reliance on inventories.
However, these mechanisms have limits, according to McKinsey, with oil inventories shrinking, alternative routes also facing disruption, and the refining landscape ‘especially stressed’.
Energy security
As it noted, the current impasse should act as a motivator for governments and businesses to prioritise energy security, noting that it has highlighted both the ‘resilience’ and ‘lingering vulnerabilities’ of global energy markets.
‘Energy security is less about eliminating dependencies than managing them effectively,’ McKinsey added. ‘There is no single route to resilience. Decision makers will need to build a portfolio of levers to prepare for future shocks. Different measures work over different time horizons, in different contexts, and with different trade-offs – including their emissions footprint – at a time when the world is already not on track to meet the goals of the Paris Agreement.
‘Ultimately, there are no easy exits, but there is considerable room to manoeuvre. For countries and companies that get it right, energy security need not simply be a cost to bear. It can reduce exposure to volatility, strengthen business continuity, and open opportunities to better navigate a more volatile future.’ Read more here.
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