Global oil and gas consumption will be forced lower if the Strait of Hormuz remains closed for much longer, with efforts to raise production representing only a fraction of what has been lost, according to the Dallas Federal Reserve President Lorie Logan.
Speaking at the Bank of Japan Institute for Monetary and Economic Studies Conference in Tokyo on Wednesday, Logan warned that oil and gas consumption would "need to fall more meaningfully than it has so far".
About one fifth of the world's liquefied natural gas and crude oil was shipped via the Strait of Hormuz prior to the outbreak of the Iran war. Iran has followed through on threats to fire at vessels attempting to cross strait.
Logan said that "the economic consequences would depend on the degree to which end users can switch to other energy sources or use energy more efficiently, versus curtailing economic activity."
She noted that US domestic oil production was set to increase by no more than 250,000 barrels per day by the end of 2026 and 500,000 barrels per day in 2027, based on a recent survey of industry executives by the Dallas Fed.
Meanwhile, the protracted closure of the Strait has reduced global supplies by 13 million barrels per day, she said, noting that inventory drawdowns have filled the shortfall so far, a back-up which was "finite".
"One way or another, I expect energy markets to come into rough balance before too long," she said, adding that "if the molecules aren't available, the world can't consume them."