A ‘black swan’ oil moment?—I

With the Strait of Hormuz virtually closed, through which passes a significant amount of oil where, according to International Energy Agency (IEA), ‘…an average of 20 million barrels per day (mb/d) of crude oil and oil products were shipped in 2025… With around 25 percent of the world’s seaborne oil trade transiting the Strait, and options to bypass it being limited’, in the wake of the conflict in Iran, which has also somewhat spread in the region, the impact on oil, for instance, has appeared to be a ‘black swan’ moment. There was indeed an element of surprise as there appeared to be a general sense that negotiations will likely lead the way. Yet, that did not happen of course.

The initial burst over the first few days of the conflict left the prices of Brent Crude skyrocketing to close to USD 90 per barrel. Although this came down a bit to around USD 87 per barrel, big jumps over a few days indicated high level of volatility, which once again led to prices rising over USD 90 per barrel on March 12. A March 12, Bloomberg published article ‘Global bonds erase 2026 gains as war fuels inflation angst’ alerted that foreign portfolio investment (FPI) made during 2026 had already been lost.

The article indicated in this regard: ‘Global bonds have surrendered their year-to-date gains as elevated oil prices stoke fears that inflation will reignite, triggering a selloff across fixed-income markets. The Bloomberg Global Aggregate Index, which tracks total returns from investment-grade government and corporate bonds, is now flat for 2026, with the selloff extending Thursday…’ This is likely going to create a fresh push in developing countries in particular to raise policy rate to attract FPI, which would be a mistake, given the high cost paid in terms of inflationary pressures it will likely generate, mainly through cost-push channel, for anyways a very volatile FPI or ‘hot money’ accumulation. In addition, higher interest rate will likely add to already difficult debt distress facing many countries, including Pakistan, along with adding to gross financing needs, which are already high for Pakistan over the medium-term.

Last, but not the least, in the hindsight this war may strongly appear unnecessary, given negotiations could have been a much better option, especially in terms of significant loss of life this war has already inflicted; not to mention the fact that the region was already in turmoil at the back of prolonged, and highly deadly conflict in Gaza.

To that extent, while it holds the basis of being a ‘black swan’ moment in terms of holding the element of ‘surprise’, and ‘unpredictability’, the Iran War (2026) does not hold the attribute of not being avoidable, which will most likely be the case even when seen in hindsight – hence there is not much likelihood of the War in Iran suffering any ‘hindsight bias’ in terms of being justified later on, in terms of being inevitable in terms of happening – because in the particular case of conflict in Iran, it strongly appears that there were quite clear negotiating ways available to avoid the conflict.

Highlighting the seriousness of the conflict, and its possible repercussions for the global economy, overall security, and peace situation, noted economist, Jeffrey Sachs in a recent interview with Pierce Morgan, painted rather a bleak (but apparently quite likely) scenario in terms of this War getting prolonged, and indicated in this regard, ‘…this War is not ending in the next few days.

Israeli generals have said this publicly, this could on into the fall, and the American public is being prepared for a long war. …I don’t see it in the markets either, in the soaring oil prices. I don’t see that in the behavior of energy producers, suppliers, and shippers. I don’t see it in the shutdown of production in Qatar in its gas, and Iraq in its oil, and the destruction of oil fields.’

The conflict, in particular with regard to the closure of the Strait of Hormuz has caused serious shortage of oil, where the blockage has led to oil production cut backs. According to March 11, Bloomberg published article ‘IEA proposes oil stockpile release to ease price pressure’ as against the production levels in February at 10 million (M) barrels (bbl), only a maximum of 2.5M bbl were being produced by Saudi Arabia currently per day.

Similarly, the UAE had reduced production from 3.56M bbl in February to 0.8M bbl, Kuwait decreased from 2.57M bbl to 0.5M bbl, and Iraq from 4.34M bbl to 2.9M bbl, while overall the production in the region decreased from 20.47M bbl, to a little less than a third of the production in February at 6.7M bbl.

On one hand, this will likely negatively impact economic growth of these oil exporting countries, whose mainstay for the economy comes in the shape of oil revenues while, on the other hand, for net oil importer countries, deep supply shortage of oil – and, in turn, sharp rise in its price – is already spelling huge balance of payments, and imported inflationary consequences for these countries; not to mention the likely dip in workers’ remittances from these oil rich countries to a number of countries in the region, including Pakistan, given a large number of people from these countries work in the Middle East.

Here, it needs to be mentioned that Pakistan was already facing an annual gross financing gap of around USD 20 billion over the medium term, and with severe aggregate demand management – although a wrong approach, given a more balanced aggregate demand, and supply side policies should have been adopted – policies employed under firstly IMF’s standby arrangement (SBA) programme, and currently ongoing extended fund facility (EFF) programme, had already left economic growth reeling for a number of years at a low level of around 3 percent on average over the medium term.

The sharply rising macroeconomic consequences of the current conflict run a serious danger of exacerbating debt distress.

Moreover, the accompanying neoliberal-, and austerity agenda of these IMF programmes – not to mention similar policy practice in general over many decades now under the influence of ‘Chicago boys’-styled domestic policymakers, and the inherent bias of neoliberal, and austerity policies allowing perpetuation of elite capture likely self-selecting these policies for practice by politico-economic elites by design – has enhanced poverty, and income inequality, and reduced resilience. Better situation of these variables, in turn, would have likely more appropriately shielded the economy against these shocks, especially in terms of greening the economy away from fossil fuel usage.

Here, it needs to be indicated that austerity policies in economics literature refer to broadly aggregate demand squeeze policies, done primarily through monetary austerity done primarily through the use of policy rate, and through fiscal austerity or fiscal consolidation; which is different from more general usage of the term ‘austerity’ sometimes to indicate non-development expenditure rationalization policies, for instance, as recently announced by PM, primarily with regard to reaching oil usage related savings in the wake of the conflict in Iran.

A March 10, news report ‘PM announces cut in govt expenditure’ published in Business Recorder, for instance, pointed out in this regard, ‘Prime Minister Shehbaz Sharif on Monday unveiled a comprehensive national austerity policy intended to reduce government spending, describing the measures as essential to conserving fuel in light of the global energy crisis…’

An example of lack of built-up of capacity of government in terms of regulation, under the onslaught of neoliberal mantra of limited government, and which only reacts to market failures, and does not co-shapes markets from checking over-profiteering, and incentivizing better allocation of resources towards building greater resilience, and for adaption, has overall led to government apparently inordinately increasing prices of petrol, and diesel for instance.

A March 10, Business Recorder editorial ‘Fuel price surge’ highlighted with regard to windfall gains for oil companies as ‘Critics, however, argue that the authorities may have acted prematurely as Pakistan reportedly had fuel stocks for 20-25 days, while the magnitude of the hike was also deemed too steep for a population already facing acute economic hardship.

The timing also invited scrutiny: the previous revision came on February 28, and with fuel prices normally adjusted fortnightly, the latest increase arrived just a week later, effectively handing oil marketing companies windfall gains on inventories purchased earlier at lower international prices.’

(To be continued)

Copyright Business Recorder, 2026