The Global Oil Shock of 2026: The Impact of Supply-Demand Mismatch on Fossil-Fuel-Dependent Economies
The price of crude oil has responded unfavourably to the recent partial closure of the Strait of Hormuz by Iran in response to American and Israeli military actions in the Persian Gulf region. Prior to 28 February 2026, when the conflict began, crude oil was trading at $72 a barrel, before peaking at $119.50 a barrel on 9 March, and then approaching $108 at the time of writing.
Crude oil (aka ‘black gold’) is the most important commodity to be traded on international commodity markets, and the most actively traded commodity in centralised exchanges-through futures contracts. One barrel equates to 42 gallons, or 158.98 litres of crude oil.
The global benchmark oil price is determined by the price of Brent Crude Oil, a light crude oil that is named after the North Sea oilfield where it was first extracted. The majority of oil is traded for delivery at a specified future date. The quoted price on the Intercontinental Exchange is for a contract to buy a barrel one month from the date. Crude oil prices thus reflect future expectations of change, and have kept in step with President Trump’s various contradictory statements about the direction of the war on Iran.
Retail prices at petrol pumps reflect crude oil prices, supply chain issues (refining, shipping and inland transport costs), taxes, and petrol station markups. There is, however, a lag period before changes in crude oil prices are reflected in prices for consumers.
Crude oil is derived from the fossilised remains of phytoplankton (microalgae), or “plants of the sea”, and zooplankton, tiny aquatic animals. Supplies of non-renewable resources are thus finite, and as reserves decline countries once highly dependent on oil revenues are seeking to diversify their economies to avoid falling victim to the so-called “Dutch disease” of over-reliance on a single natural resource. Indeed, no giant oil field (30 billion-barrels plus) has been discovered anywhere since 1951.
Traditionally, oil is extracted from underground reservoirs via vertically drilled wells, while shale oil is obtained by the hydraulic fracturing of subterranean rock formations and conveyed through horizontal pipes prior to reaching the surface. Crude oil is processed in petroleum refineries. Fractional distillation separates crude oil into different fractions, based on their volatility and relative molecular weights. The lighter fractions include petroleum (gasoline), aviation fuel, naphtha, kerosene, and paraffin. Diesel and gas oil are medium distillates, while tars, asphalts, and waxes are the heaviest. Important chemical by-products of distillation, or petrochemicals, are used to make plastics, synthetic fibres, resins, lubricants, solvents, medicines, paints, cosmetics, fertilisers, pesticides, explosives.
According to the International Energy Authority (IEA), an oil-thirsty world used 83.3 million barrels per day in December 2025. Oil shocks are a reflection of continued and heavy dependence on fossil fuels. Oil producers were quick to take advantage of their privileged status by setting up the world’s first oil cartel, the Organisation of Petroleum Exporting Countries (OPEC), back in 1961. The first global oil shock was triggered by an OPEC embargo on oil production in response to American support for Israel in the aftermath of the Yom Kippur War of October 1973. Subsequent oil shocks were caused by active disruption of oil supplies following the Iranian Revolution in 1979 and the Iraqi invasion of Kuwait in 1990. The oil shock of 2007-2008, on the other hand, reflected strong demand at a time of stagnating production.
In historical terms, oil is a relatively recent arrival when it comes to human usage. The first oil well was struck by Colonel Edwin L. Drake at Titusville in northwestern Pennsylvania in August 1859, setting off a “black gold rush”, which soon spread across North America. Oil was discovered in Iran in 1908, Venezuela in 1922, Iraq in 1927, Saudi Arabia in 1938, Nigeria in 1956, Alaska in 1968, and the North Sea Continental Shelf in 1970. America led the way in petroleum production with its love for the motor car and became famous for its “gas-guzzling” vehicles, which had to make way, after the oil shock of 1973, for fuel-efficient vehicles in line with the Corporate Average Fuel Economy (CAFE) standards passed by Congress in 1975.
The current global oil shock has concentrated minds in vulnerable economies, especially those downstream of the Strait of Hormuz-in Asia and Australasia. Governments are developing strategies to cope with continued demand in the face of shrinking supplies. Demand reduction measures include rationing of fuel sales, planned blackouts and workplace shutdowns, working from home, the use of subsidised public transport, restrictions on air travel, and additional taxes on petrol and diesel. Many of these suggested options rely on altered human behaviour in the face of financial constraints. Supply-side measures are less likely to be feasible in a situation where oil reserves are proving to be scarce. Although IEA member countries agreed to release 400 million barrels of oil from emergency reserves on 11 March, this had only limited impact. Strategic reserves are generally reserved for national disasters or war, to protect critical parts of the economy including key industries and emergency services. The current oil shock will eventually dissipate, but in doing so will once again make the case for reducing our overt reliance on fossil fuels in favour of nuclear power and alternative renewable resources.
Ashis Banerjee