The ongoing disruption in the Strait of Hormuz has laid bare severe structural vulnerabilities within the global energy architecture, marking the second major fossil fuel shock in just four years following the Russia-Ukraine war, the Institute for Energy Economics and Financial Analysis said on Monday.
When supply disruptions hit, the economic fallout rapidly escapes the energy sector to propagate across the wider global economy, the IEEFA said.
Spikes in oil and gas prices instantly feed into global inflation, forcing central banks to halt or aggressively reverse planned interest rate cuts, it added.
Consequently, asset classes re-rate globally, growth expectations soften, and standard portfolio diversification strategies fail to shield institutional investors from macroeconomic downside.
The global shockwaves of these crises are disproportionately borne by emerging markets that rely heavily on imported fossil fuels.
South Asian economies face extreme vulnerability. India imports nearly 89% of its crude oil, while Bangladesh, India, and Pakistan collectively import almost two-thirds of their liquefied natural gas directly through the blockaded Strait of Hormuz.
As regional risk escalates, institutional capital swiftly retreats from these higher-risk jurisdictions to safer havens, it said.
During the current crisis, the MSCI Emerging Markets Index shed more than $1 trillion in market capitalization in less than a week.
This rapid capital flight triggers a devastating second-order effect, driving severe currency depreciation and driving up domestic borrowing costs at the exact moment that capital-intensive clean energy solutions become most urgent, IEEFA noted.
While the technology costs of wind, solar, and battery storage have plummeted, cheaper hardware does not automatically solve financing constraints during a broader credit squeeze.
Renewables are highly sensitive to tightening financial conditions due to their steep upfront capital expenditures.