McKinsey: Global Energy Shock Absorbers Are Wearing Thin

Bridging the immediate supply gap

Prior to the crisis, approximately 21 million barrels per day of oil flowed through the Strait. When the waterway closed, markets faced an immediate supply-demand gap of 15.5 million barrels per day.

The global system closed this gap through a massive rewiring of trade. Saudi Arabia’s East-West pipeline and the United Arab Emirates’ ADNOC pipeline to Fujairah ran at maximum capacity, effectively offsetting 35 percent of the missing barrels.

Furthermore, inventory drawdowns absorbed another 20 percent of the shock. The US led a coordinated International Energy Agency (IEA) release by tapping its Strategic Petroleum Reserve, while China leveraged its own massive stockpiles.

However, McKinsey notes that demand destruction and flexibility eventually accounted for the largest share of the adjustment, neutralizing 45 percent of the gap.

Chinese refiners prioritized transport fuels and substituted missing naphtha with imported American ethane and domestic coal-to-chemicals conversions that triggered a 40 percent drop in Chinese seaborne crude and refined product imports.

While the immediate crisis was contained, the shock absorbers that prevented an economic catastrophe are dissapating. By late August, the global economy had drawn down half a billion barrels from inventories.

The US Strategic Petroleum Reserve now sits below 300 million barrels, approaching its statutory floor, while the most significant remaining crude stockpiles remain locked in China.

Infrastructure as insurance

Structural strain has also caused gulf refineries to cut output by more than one-quarter due to regional disruptions and physical damage, while approximately two million barrels per day of Russian refining capacity remain offline.

Meanwhile, global product inventories for critical fuels like diesel and jet fuel are currently hitting five-year minimums in both the US and Europe.

In response to the crisis, governments and corporations are actively fortifying energy security. The report estimates that measures currently underway or under discussion could offset between 35 and 70 percent of pre-crisis oil flows through the Strait by 2030 in the event of a future shock.

Bypass pipelines represent the most significant potential offset. Global spare pipeline capacity around the Strait sat at 4.5 million barrels per day prior to the crisis and was on track to reach 6.5 million barrels by 2030.

Following the recent disruptions, newly discussed projects including an Iraq-Turkey pipeline and a third conduit connecting the UAE’s interior fields to Fujairah could push total diversion potential to 13 million barrels per day.

However, McKinsey cautions that these infrastructure investments serve as insurance rather than direct displacement of Gulf supply.

While large pipelines cost less than US$10 per barrel to operate at full utilization, they do not displace the underlying economic advantage of Gulf crude, which remains at the bottom of the global cost curve between US$5 and US$30 per barrel.

Furthermore, bypass routes remain highly exposed to broader regional conflicts, as evidenced by recent escalations near the Red Sea terminus of the Saudi East-West pipeline.

Costly fallbacks

The touted alternative of transitioning away from fossil fuels entirely also presents a technical ceiling.

McKinsey estimates that replacing imported oil and gas with currently viable low-emissions technologies could theoretically displace 26 to 31 percent of today’s global oil and gas consumption.

While electrification is scaling commercially for passenger vehicles and low-temperature industrial heat, alternatives for aviation, maritime shipping, and high-temperature industrial processes remain emerging and prohibitively expensive.

Coal presents another controversial fallback option. Nations like China and India possess massive domestic coal endowments and are announcing new coal-to-liquids conversion capacity to replace oil.

However, this conversion process costs between US$75 and US$185 per barrel and heavily penalizes global greenhouse gas reduction targets.

Ultimately, the report concludes that for both exporters and importers, energy security cannot be achieved by completely eliminating dependencies.

Instead, long-term resilience requires a continuous, expensive balancing act of diversifying suppliers and maintaining strategic buffers to ensure that inevitable supply chain disruptions do not trigger systemic economic failures.