The world’s new energy system may be harder to shock than we assume

The latest concerns over the Strait of Hormuz produced a familiar cycle of headlines:

Supply disruption.

Oil price volatility.

Warnings of inflation.

Predictions of economic damage.

For anyone who has spent time in energy markets, the logic feels obvious.

For much of the last half-century it was: oil shock → inflation → recession.

The oil crises of the 1970s embedded this relationship deeply into policymaking, financial markets and public consciousness.

Energy security became synonymous with avoiding supply disruption at almost any cost.

Yet something interesting has happened over the last five years. Perhaps it has been happening for the last ten.

The world has experienced a succession of recent major energy shocks:

• The threat then loss of Russian gas supplies into Europe.
• Then Russia’s invasion of Ukraine
• Attacks on shipping in the Red Sea.
• Repeated concerns over Hormuz.
• Escalating tensions involving Iran making the Hormuz concerns real and resulting in perhaps long-term restrictions of movement through it.

And yet the outcomes have been more surprising than perhaps many expected.

Inflation eventually fell and now falls again . Economies adapted and economic activity continued.

Oil and oil product prices rose, then fell, but did not remain permanently elevated, and in real terms have sank back to levels of over 20 years ago.

The world – at least in certain states – learned: strategic reserves were deployed and meanwhile global demand adjusted.

Fossil fuel substitution accelerated in a long-term trend: electricity being gradually then suddenly released from its fossil fuel pairing, and then leaping into transport.

This does not mean fossil fuel energy no longer matters.

Nor does it mean the world is suddenly immune to oil supply disruption.

Far from it.

But

When does a system stop behaving as it used to?

Oil shocks no longer propagate exactly as they did in 1970s or 1980s.

The international oil majors no longer behave exactly as they did in the 1990s.

Alternative energy systems such as electrified transport have emerged in the 2010s.

None of these prove a transition.

But they suggest something deeper may be shifting underneath.

If Hormuz were closed for twenty months rather than twenty weeks, the consequences would be severe.

The world still consumes around 100 million barrels of oil every day.

And many countries remain acutely exposed to fossil fuel imports.

For households, businesses and governments, physical dependence on oil and gas remains very real.

But perhaps we are now asking the wrong question.

Previously it was – how dependent are we on fossil fuels?

Now it may be more – how dependent are we on fossil fuel stability?

Those questions are not the same thing.

For multiple decades, the fossil fuel system occupied a unique position within the global economy.

It has been simultaneously the dominant energy source, the marginal energy supplier and – when interrupted, or manipulated – a major transmitter of inflation.

A disruption in one part of the system could rapidly cascade through the entire economy.

Today, that relationship appears weaker.

Energy intensity has fallen across many economies. Efficiency has improved. Strategic reserves in large economies such as China are much deeper.

Supply chains have gradually become more diversified overall and now more directly with the Saudi strategy of the Straits of Hormuz by-pass logistics.

A five-year history of energy would say we are “seeing big things happen in oil supply shocks”.

A 75-year history would say “we saw big things like Hormuz happen before”, 1973, 1979, 1985 ..but what it showed was the wider energy system had started changing.

And a historian might simply observe that, over time, economies did not lie down and collapse in the face of oil supply disruptions in any era, but found more and more creative solutions.

To varying degrees of success, they observed, learned and adapted.

The result of this is not the elimination of oil supply risk.

Rather, the transmission mechanism between energy disruption and broader economic disruption appears less direct than it once was.

Perhaps the most interesting evidence is what did not happen in the recent events.

In previous decades, a significant Middle East oil crisis would have rapidly translated into expectations of persistent inflation.

Markets would have assumed that higher energy prices would spread through the economy, forcing prolonged monetary tightening.

This time, the response was more restrained.

Not because energy prices have become irrelevant.

But because markets increasingly assume economies can adapt.

Inventories can be released. Demand can respond. Alternatives can now quickly expand and be quickly deployed.

A misunderstood risk

Traditional energy security seeks to secure physical fuel supplies.

That visible risk remains easy to identify. A shipping lane closes. A pipeline is disrupted. A producer experiences political instability.

But – structural risk management is harder to see, and may be more important.

The shape of energy demand is changing.

Electricity now represents over one-fifth of final world energy consumption, but it is outpacing total energy demand and is capturing growth across transport, heating and industry.

At the same time, many of the technologies supplying that growth — solar, batteries, electric vehicles and storage — are manufactured rather than extracted.

Their economics are shaped increasingly by learning rates and capital deployment rather than fuel availability.

The significance of this shift is not that fossil fuels disappear or even decline sharply. It is that energy alternatives now exist at meaningful industrial scale.

And every oil shock reminds consumers, businesses and governments why these new alternatives are so attractive.

Every oil supply disruption performs two functions.

First, it creates immediate costs and uncertainty.

But second, right behind, it becomes a global advertisement for energy diversification – and a rush to alternatives if they are available.

This does not mean the transition is inevitable. Nor does it mean fossil fuels are disappearing anytime soon. Physical dependence remains substantial.

But economic dependence on fossil fuel stability more than fossil fuels themselves may be beginning to weaken.

Much of today’s energy debate still assumes that physical dependence and economic vulnerability are identical.

The evidence increasingly suggests they are starting to diverge.

The world may remain heavily dependent on fossil fuels for years to come.

What is becoming less certain is whether it remains equally dependent on fossil fuel stability.

The distinction is subtle. The consequences may not be.

Which leads to the great 21^St century energy paradox:

The world is still heavily dependent on fossil fuels – but the world is becoming less vulnerable to fossil fuel disruption.

The world’s new energy system may be harder to shock than we assume.