Insights

Thinking About the Unthinkable

March 12, 2026

Almost a year ago, markets were grappling with the implications of “Liberation Day.” Investors were surprised by both the scale and structure of new tariffs. Stocks initially fell about 10% as markets worried that the measures could push the U.S. economy toward recession.

That outcome never materialized. Many of the tariffs were later moderated, and businesses gradually adapted through supply-chain adjustments or price increases. Corporate earnings proved stronger than expected, with continued investment in artificial intelligence infrastructure playing a significant role in supporting economic growth.

At the time, our reaction was to ask how such sweeping trade actions would unfold and what the long-term implications might be. Since the legal and political debates around those policies were likely to take months or years to resolve, we focused on the practical question that matters most for investors: how might portfolios be affected?

Today we find ourselves asking a similar question in response to a very different development.

A Shock to the Global Energy System

It has been nearly two weeks since the beginning of “Operation Epic Fury.” The motivations and long-term objectives are still being debated and may only become clear with time.

For decades, tensions in the Middle East have periodically rocked oil markets. However, the current situation is notable because tanker traffic from the Persian Gulf has been severely disrupted. The Strait of Hormuz — the world’s most important maritime energy chokepoint — has been effectively closed to most commercial shipping since March 1.

Under normal conditions, roughly 20 million barrels of oil per day move through the strait (about 19% of global daily oil consumption).

There are alternative routes that bypass the strait, including pipelines and export terminals across the region. However, their combined capacity is estimated at roughly 9 million barrels per day, far short of normal flows, and they aren’t immune from attack.

Each additional day of disruption increases pressure on global supply chains.

Possible Market Scenarios

At this stage, it may be useful to consider three broad scenarios for the Strait of Hormuz:

1. Full Reopening

Shipping resumes relatively quickly and oil flows begin to normalize. Prices will likely gradually move back toward prior levels as supply chains stabilize.

2. Partial Reopening

Limited shipping resumes but at reduced volumes, perhaps with military escort and still under some threat of attack. Oil prices remain elevated — perhaps near $100 per barrel — as essential demand is met while more price-sensitive uses decline.

3. Extended Closure

If the strait remains closed for a month or longer, markets may rebalance at significantly higher prices. In such a scenario, oil could rise far beyond $100 per barrel before demand destruction begins to stabilize the market.

Reacting to every headline, it seems markets are vacillating between scenarios 1 and 2 at the moment.

Global Economic Implications

The consequences of a sustained disruption would vary widely across regions.

Countries heavily dependent on imported energy — including major Asian economies such as Japan and South Korea — could face severe challenges. In addition, less developed economies and lower income consumers are typically hit hardest by rising oil prices.

Increased spending on fuel generally leads households and businesses to reduce spending elsewhere. Whether the AI build-out might be slowed is an open question.

In the United States, the impact may be somewhat cushioned by strong domestic energy production and the country’s modest net energy surplus. At the same time, we’ve already seen gasoline prices spike, which will affect our commuting costs and the price of transportation for nearly all goods, and may lift broader inflation expectations.

Historical Perspective

This would not be the first time the Strait of Hormuz has faced major security concerns.

During the later stages of the Iran–Iraq War (1980-88), attacks on energy infrastructure escalated into what became known as the “tanker war.” Both sides targeted commercial shipping in an attempt to disrupt the other’s economy.

Kuwaiti tankers carrying Iraqi oil were especially vulnerable. Eventually, the United States began escorting them through the Gulf in one of the largest naval convoy operations since World War II, according to the U.S. Naval Institute.

That episode illustrates an important point: historically, the international community has often acted to restore the flow of maritime energy trade when disruptions threaten the global economy.

What We’re Doing

Several key questions will shape the outlook in the coming weeks:

• How long will shipping through the Strait of Hormuz remain disrupted?
• Can alternative pipelines and export routes expand flows meaningfully?
• Will naval security measures restore confidence among shipping companies and insurers?
• How quickly will oil inventories begin to tighten globally (taking into account likely releases from global reserves)?
• When will higher energy prices begin to affect economic activity and consumer spending?

Geopolitical events are inherently difficult to forecast. What we can do is assess potential scenarios and think carefully about how different outcomes could influence energy markets, inflation, and global growth.

For now, the most important variable is time. Short disruptions tend to create volatility but limited long-term damage. Extended disruptions, however, have historically produced broader economic effects.

As always, our focus remains on understanding how these developments might influence markets — and preparing portfolios for a range of possible outcomes. This involves reevaluating the risk / return profiles of existing holdings, while also searching for new investment opportunities that aren’t directly impacted should the Straight of Hormuz remain closed for an extended period.