Famine, market crash, economic collapse: Mid-East shock is a live experiment in collapse

Financial markets treat the economy as an engine driven by monetary policy. Reality dictates otherwise. At its base, the economy is an energy processing mechanism. Central banks cannot print oil or other commodities.

As we enter week three of the Strait of Hormuz closure in March 2026, macroeconomic models fail because they misdiagnose the problem. Physically removing 10-20% of oil and natural gas consumed starves the global engine. Perhaps for the best, although not without significant pain most collapse-aware predicted would one day arrive.

What’s unique about this shock is that it originates on the supply side. Typically, a demand shock originates in the financial layer. The 2008 Great Financial Crisis and the 2020 COVID-19 lockdowns serve as examples. In these scenarios, the infrastructure of the world remains intact, but consumers stop buying. Credit freezes or governments mandate business closures causing prices to fall. Central banks solve demand shocks by lowering interest rates and injecting fiat currency to stimulate consumption.

A supply shock originates in the physical layer. The current Hormuz closure is a supply shock. Consumers (by consumers, I am referring to any buyer - individuals, businesses, governments) have the means and will to buy, but physical goods vanish. As a result, production halts because the baseline input is absent. Shortages push prices up. Unlike demand shocks, central banks are stuck in a stagflation trap. Inflation requires contractionary policy to starve demand, but weaker production requires lower rates to offset demand destruction. Monetary policy cannot fix a physical deficit.

The problem with modern economics is that it models financial, but not necessarily physical, reality. It assumes consumers reallocate spending to cover higher energy costs, creating demand destruction elsewhere. This is a miscalculation.

When 10% to 20% of global oil, natural gas, and fertilizer leaves the market, those raw materials cease to exist for the end user. Capital cannot substitute for physical joules of energy. A freight network cannot run on fiat currency and nitrogen-based synthesis requires physical gas.

This is a road test for systemic collapse. The physical limits of the remaining energy supply impose a hard ceiling on global output. The world is in a situation where scarcity means using less or some simply go without. Typically, in these situations, cooperative shrinkage goes out the window and the strongest players hoard raw materials through violence or economic coercion.

Why does everything seem normal then?

There appears to be an illusion of stability in the financial markets and local economies. Screen benchmarks like West Texas Intermediate (WTI) and Brent crude trade in the $95 to $100 range, so it’s understandable to interpret the current shock as a nothingburger.

However, what I’m seeing beneath the surface is physical markets in panic mode. Crude oil purchased for physical delivery in the Gulf region trades closer to $150 per barrel. Refined products, such as jet fuel and diesel, have broken pricing models. APAC countries are in a countdown to energy collapse.

The paper benchmarks are trading on the assumption of future liquidity and military resolution, as illustrated by forward pricing. Forward inflation expectations also anticipate a rapid normalization of traffic through the Strait of Hormuz. Of course, there’s a chance the markets are right. But the downside risks if wrong are massive. For the financially-minded, it’s an asymmetric bet with little upside and a ton of downside.

The longer this conflict goes on, the more difficult it will be to return to normal. Maritime transit has halted, onshore storage in the Gulf maxxes out (aka “tank tops”) and producers must shut-in production. Restarting halted production takes time, and the longer a well is shut the more permanent damage is done. Marginal wells suffer pressure damage and require months of workovers to restore flow rates. Even if the Strait opens today, the market faces a ghost deficit. Clearing the maritime backlog, draining storage, and restoring wells takes months, therefore the supply deficit will outlast the military conflict.

Remember January 2020? When we saw videos of crowded Chinese hospitals, people lying in the street dying of a strange new virus, and entire Chinese provinces in lockdown? The stock market continued its upward trend, blithely unaware of epidemiology, until it suddenly crashed starting February 20th. My point is markets are to be taken as a witness and not a soothsayer.

In my opinion, the 1973 crisis provides the closest blueprint for our current scenario (although today is actually worse). Arab nations removed barrels from the market, and oil surged 300% triggering global stagflation. During this period, US GDP contracted by 3.2% as industrial activity slowed. World economic growth plummeted from 6.8% in 1973 to 2.8% in 1974, reaching a low of 1.9% by 1975. In response, the S&P 500 dropped 48% as higher input costs destroyed margins and end demand. Treasury bonds generated negative real returns as inflation consumed yields. The standard balanced portfolio failed, with gold (surging 200%) and other real assets as the lifeboat.

Energy starvation forces a cascade of industrial failures. High-energy sectors halt first, transferring the shock to human necessities. Aluminum and steel smelting require baseload electricity. Governments might force these facilities offline to stabilize residential grids. Europe and East Asia face de-industrialization. But this isn’t about big businesses. The individual is hit hard by prices and shortages - most dangerously, shortages of food.

The Haber-Bosch process synthesizes nitrogen fertilizer using natural gas. Stranded LNG means fertilizer plants halt production. Disrupting the spring 2026 planting season ensures lower global crop yields by fall, and scarcity could worsen throughout late 2026 and persist through 2027. The lag tends to take six to twelve months. Beyond that, who knows.

Regional experiences will vary, based on dependency of commodities flowing through the Strait, proximity to alternatives, and self sufficiency. Capital will likely flow from net importers, like Japan, to net producers like The United States, Canada, and Brazil. They possess domestic oil, refining capacity, and agricultural dominance. That’s not to say individuals and businesses in these countries won’t suffer. They simply may not experience the worst case scenario. However, this materially depends on local government responses. History is full of examples where countries that produced more food than they needed were still forced into mass starvation by damaging economic policies. Also, windfalls may pool within small niches of the economy, such as the Canadian oil patch, leaving the majority to fight for themselves.

The longer the Strait of Hormuz remains closed (or throttled) the more today’s scenario will resemble true collapse. Forecasts rest on military logistics, insurance mechanics, and geopolitical constraints. Commercial tankers require Protection and Indemnity insurance and syndicates will not underwrite vessels while anti-ship batteries threaten the corridor. All it takes is one rocket attack per week - asymmetric warfare 101.

In my view, the most optimistic case for reopening is late March 2026 with maybe a 10–15% probability. This requires an immediate ceasefire. Naval forces require three weeks to sweep the strait for sea mines. During this time, global GDP growth would still dip. The Strategic Petroleum Reserve bridges the supply gap to a degree, but despite the headlines of 400 million bbls being made available, the actual flow rate is only about 2 million/bbl per day. It is currently March 17th. I think this scenario is betting on a miracle.

A slightly more realistic case assumes a three-month closure resolving in June 2026 . This gives time for gradual de-escalation, some sort of agreement and semblance of regional commercial security. During this time, reserves deplete, Europe and Asia mandate some form of rationing of energy, fertilizer and other chemicals (e.g. sulfur and helium, which are used to produce semiconductors). Global GDP contracts 2% to 3%. Europe and Asia enter deep recessions and the US enters a stagflationary recession. Fall 2026 harvests fail, pushing food prices up 30% by 2027. Equities enter a bear market with a 25%-35% drawdown. The stagflationary environment sends yields higher, destroying valuations for long-duration assets, such as the Mag-7 companies. Unfortunately, even this case seems optimistic. June is 2.5 months away and wars have a tendency of outlasting even the best-laid plans. And the US triggered this war with no plan whatsoever.

Historically, for every 1% increase in global GDP, energy consumption has risen by roughly 0.4% to 0.7% depending on the decade. In a normal growing economy, we gain efficiency over time. However, in a sudden contraction, the relationship becomes non-linear and much more rigid. Because the base load of civilization (heating, basic logistics, food production) cannot be turned off, a 10-20% drop in energy supply leads to a systemic seizure.

What’s the worst case? I’d say a closure of six months or more. Asymmetric denial via drone and small boat strikes makes the Strait an uninsurable zone and attacks on export terminals lock in a six-month timeline for repairs. Global oil and natural gas remain in massive supply deficit, equaling about 10-20% of annual consumption. Global GDP contracts 5% to 8% - shrinking to fit the remaining available joules and calories. This decline dwarfs the 0.1% global contraction recorded during the 2008 Global Financial Crisis. Rolling blackouts strike Japan and Europe. Sovereign debt fractures in emerging markets and famine strikes many nations by 2027. Equities draw down between 50% and 70% as the market re-prices for structural energy starvation. Treasuries fail. Capital preservation relies on cash, physical metals, and critical infrastructure.

I’m speculating as to the outcomes, but none are even close to business as usual. Regardless of the actual result, we are participants in a live experiment with collapse. Ironically, maybe simply cutting energy production by a whopping 20% is what we needed to do all along.

Thank you for reading.

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