Energy crisis: Why it’s different this time

Economists are mocked for many things, not least their habit of declaring “This time is different” — often just weeks before a bubble bursts or reality reasserts itself. Yet there are several ways in which the current oil shock really does appear different, and not just because the International Energy Agency has described it as the largest supply disruption in the history of the global oil market.

What sets the current energy crisis apart is that it is exposing structural weaknesses within the broader global economy. After several decades in which hyper‑globalisation deepened integration and pared back supply chains, the shock absorbers that once cushioned energy disruptions have been weakened. Instead of dampening the impact of a crisis, today’s intensely interconnected and financially fragile global system is amplifying it.

This stands in stark contrast to earlier decades. The oil shocks of the 1970s abruptly removed supply, but the system had buffers such as higher inventories, geographically diverse refining capacity and numerous suppliers.

Crucially, the world economy was supported by younger, expanding workforces, stronger productivity growth and far more structural flexibility. The same was true during the 1990 Gulf War, which hit a world on the cusp of the IT‑era productivity boom, with rising potential growth, healthier public balance sheets and central banks with ample room to cut interest rates.

Today’s shock is quite different: a prolonged energy disruption is hitting a world with eroded buffers, ageing populations, weaker trend growth and far less policy space to respond.

Four key mechanisms help explain why the global system is now amplifying rather than absorbing the energy supply disruption.

First, supply chains are transmitting shocks rather than absorbing them. Three decades of hyper‑globalisation left firms running ultra‑lean, cross‑border production systems built around just‑in‑time (JIT) logistics. Efficiency, it turns out, was achieved at the expense of resilience as buffers shrank and slack disappeared. Supply chains became so tightly coupled that a disruption in a single node — a war, a pandemic or even a port closure — now ripples through trade, logistics and financial markets almost instantly.

Because JIT rewarded scale and predictability, companies gravitated towards single‑supplier and single‑route dependence. So, when a chokepoint such as the Strait of Hormuz is disrupted, factories quickly run out of inputs, delays spread across continents and stoppages in one region quickly trigger shortages in another. A regional supply shock becomes a global production shock.

Second, financial markets are now amplifying volatility instead of containing it. As the International Monetary Fund has repeatedly warned, years of near‑zero interest rates encouraged investors to borrow heavily and take bigger bets on riskier assets, including commodity‑linked derivatives. That leaves parts of the financial system far more exposed. When oil prices jump, investors rush to sell to raise cash, spreading volatility across markets. Investors withdraw from riskier emerging economies, currencies weaken and global financial conditions tighten almost immediately. Instead of absorbing the shock, markets now transmit it at speed.

Third, elevated debt levels turn a price shock into a broader economic shock. Households, companies and governments entered this crisis with far more debt than in previous oil shocks, and with interest rates already high the burden is heavier. Higher fuel costs squeeze household disposable income, firms pass on rising input costs more quickly and governments have limited fiscal space to cushion the blow. When debt is high across all sectors, even small increases in prices or interest rates are felt more keenly and, with no slack in the system, the shock hits balance sheets directly and simultaneously.

Finally, the concentration of energy infrastructure magnifies disruptions. A growing share of the world’s energy, trade and critical technologies now depends on a handful of narrow maritime corridors — including the straits of Hormuz, Bab el‑Mandeb and Malacca — leaving the system more exposed than in previous decades.

Refining capacity and liquefied natural gas (LNG) terminals have also become more concentrated, not less. Unlike other maritime chokepoints, the Strait of Hormuz has no viable alternative route. This makes it the world’s single most critical energy corridor for almost a fifth of its oil and a quarter of its LNG.

When that route is threatened, there is nowhere else for traffic to go, and refined‑product shortages spread globally. A regional disruption becomes a global price shock.

No previous oil shock has hit South Africa in such a vulnerable state

Geopolitics adds a further layer of instability. The global order is more fragmented and less co-ordinated than at any time since the end of the Cold War. Under the second Trump administration, the US is no longer acting as a consistent stabilising force, while China is growing more assertive. Multilateral institutions such as the World Trade Organisation and UN are losing influence.

Energy markets, once cushioned by co-operation among major producers and consumers, are now hard hit by strategic rivalry — with the UAE’s recent decision to leave Opec+ offering a clear example. The result is a world in which crises last longer and spill over more easily.

Central banks now face a renewed squeeze on policy space. Interest rates remain high and inflation expectations are fragile, leaving many policymakers in limbo as they await clearer evidence of how the Middle East crisis will feed through to prices.

The surge in fuel and transport costs has slowed disinflation across major economies, forcing some countries, such as Australia, back into tightening mode and prompting others, including the European Central Bank, to consider hiking rates.

In the US, the Federal Reserve’s anticipated rate cuts have been shelved as higher energy prices keep inflation sticky and complicate the return to target. As a result, global central banks face a familiar dilemma: tighten into an energy supply shock to contain price pressures but risk choking off growth, or “look through” it and risk unmooring expectations. Neither option is palatable, and both risk amplifying volatility.

For South Africa, the implications are significant. The country now imports the bulk of its liquid fuels, has lost most of its refining capacity and holds far less strategic reserves than international norms. A decade ago, local refineries provided a measure of insulation, but today domestic refining covers less than a fifth of national fuel demand. The balance is imported as refined product, the most expensive and volatile form of energy trade.

Strategic reserves, which should cover 90 days, are far below that threshold, with estimates of 20 to 25 days. No previous oil shock has hit South Africa in such a vulnerable state.

The inflation impact is immediate. Petrol price hikes of R3.06 a litre in April and another of R3.27 a litre in May represent the largest two-month increase in the country’s history, driven by global prices and a weaker rand. Transport costs rise first, followed by food distribution and electricity costs as Eskom burns more diesel to stabilise the grid. And the increase in the price of diesel has been even more dramatic than the petrol price hike.

The pass‑through is faster and broader than in many other economies. South Africa’s logistics system is diesel‑intensive because roughly 80% of local freight is transported in diesel‑powered trucks by road, one of the highest shares in the world, as the rail network is largely dysfunctional. So every additional rand per litre feeds into the cost structure across the entire economy.

Monetary policy is similarly constrained. As Reserve Bank governor Lesetja Kganyago noted in a recent lecture at Rhodes University, South Africa entered the current energy shock with inflation expectations not yet securely anchored at the new 3% inflation target. In such an environment, he warned, the Bank cannot “look through” a supply shock when second‑round effects threaten to spill over into wages and broader pricing behaviour.

With imported inflation rising, the Bank has little room to cut interest rates, delaying the prospect of easing and keeping borrowing costs high for households and businesses.

Fiscal policy is no better positioned. The government has already cut the fuel levy by R3 a litre in April and May at a cost of roughly R6bn in lost revenue. While political pressure to extend this relief will intensify, the fiscal position is already stretched and debt service costs are the fastest‑growing item in the budget.

The crisis offers a warning: in an era of extreme climate events, geopolitical rifts and recurring supply chain ruptures, a world without buffers will face more frequent episodes of local disruptions becoming global crises.

For South Africa, the message is blunt. As a small, open economy exposed to fuel prices, shipping costs and global financial conditions in a world of frequent shocks, we need to rebuild our domestic defences, from energy security to fiscal discipline to more diversified trade links.

With high unemployment and persistently tepid growth, the domestic economy has little capacity to absorb additional blows.