While oil prices crested at a bit over $110 a barrel In April, some 65% higher than when President Trump began his second term in January 2025, they came nowhere close to economists' forecasts when it became clear that Iran would close the Strait of Hormuz. They expected prices of $150 to $200 a barrel. Some economists feared we might hit $250.
That oil prices didn't cause a global economic crisis shows that the world has become more resilient in the face of oil shocks. I remember, as a kid, seeing lines around the corner at gas stations after OPEC imposed an oil embargo in 1973, but we came nowhere close to that this time.
The world will now move to become even more resilient, especially to possible events in the Middle East, given that we've seen that supplies can be curtailed just with some mines, speedboats and drones in the world's major oil thoroughfare. The shift toward a global economy no longer dominated by oil considerations will take many years to play out and won't be complete for decades, if ever, but the change will put the world on a new trajectory with profound changes for every industry, including insurance.
So it's a good idea to start shifting to a new mindset as soon as possible.
My thinking about a post-oil world traces back to 2010, when I was part of a sort of SWAT team at the Department of Energy distributing tens of billions of dollars to drive innovation and help stimulate the economy as part of the Recovery Act following the Great Recession of 2008-9. The leader of the project, Matt Rogers, was the leader of the oil and gas practice at McKinsey, and he had developed a thesis that was radical, especially for the time. While the conversation among economists was about "peak oil" (when global oil supplies would max out and start to diminish), he calculated that the issue was peak demand (when demand, not supply, would crest).
Matt and Stefan Heck, also a senior partner at McKinsey, developed the peak demand idea much more broadly in their 2013 book "Resource Revolution," which I helped them write. So I was intrigued when a columnist in the Washington Post declared yesterday that: "The 53-year-long oil crisis is now over, leaving the world in a better place.... The black, sticky stuff just doesn’t matter as much as it used to."
The soaring output from fracking in the U.S. over the past two decades did a lot to cushion the oil shock this time around. So did impressive flexibility by China, which reduced its imports by some 4 million barrels a day, to less than 8 million, while barely tapping its oil reserves. In coming years, Venezuela may become a major oil exporter again, and the growth of power from renewable sources will keep surging. The Post column notes: "Renewables account for 47 percent of electricity generation across the European Union and 26 percent in the U.S. The share in America is rising fast, with solar last month overtaking coal in power generation."
The columnist says the end of the oil crisis will have three major consequences, and I think he's mostly right:
"First, the Middle East won’t matter so much anymore.... Next, inflation will be subdued. Oil was a crucial enough input in a wide range of products that it helped determine their prices. The U.S. should now expect a decade or more of the cost of living barely changing from one year to the next. Finally, and most significantly, the global economy will be far more stable. Over the last half-century, soaring oil prices accompanied five major recessions or stock market slumps (1973, 1979, 1990, 2008 and 2022).... Chaos was always just around the corner."
I'm not quite as sanguine as the Washington Post writer is, mostly because I've seen too many long-term assurances get derailed. Remember Francis Fukuyama's 1992 book, "The End of History and the Last Man," which assured us that liberal democracy and free market capitalism represented the final stage of human evolution? Look around today and tell me how that worked out.
I can also see plenty of short-term hurdles. The Trump administration is actually paying companies NOT to develop renewable energy, compensating companies for canceling off-shore wind projects. This administration has also recently announced some $700 million to support coal-burning plants, even though coal is on the way out as a source of electricity. In addition, the Trump White House is trying to halt or even reverse the transition to electric vehicles, even though the shift in strategy has caused U.S. car companies to take tens of billions of dollars in write-offs and will help Chinese companies widen their already considerable global lead on the cars of the future.
But I'm still convinced that the half-century-long oil crisis is, in fact, dissipating.
The geopolitical implications will extend well beyond the Middle East. Other major oil producers, including Russia, Norway, Mexico and, perhaps, Venezuela. will lose huge amounts of revenue and, thus, influence. The world's largest producer, the U.S., won't be immune. Industries, such as chemicals, that rely on cheap energy prices in the U.S. will also lose out.
Meanwhile, China should gain influence because of its dominance in the rare earth metals that are needed for batteries, in solar panels and in electric vehicles.
The changes should, in fact, reduce global tensions in some areas, though that doesn't mean that peace is at hand. China's increasing influence could, for instance, embolden it to try to retake Taiwan, which could touch off a geopolitical crisis.
Insurers will have to tack continually as the geopolitical winds shift, and will have to guide clients wisely as they assess their risks. Insurers will likewise have to adapt as industries evolve — probably including shorter, more local supply lines at least for now, in reaction to the Iran war, and to the rise of isolationist politics, including America First.
Again, there will be lots of twists and turns. Look at how fast Trump reversed U.S. policy in support of electric vehicles. But I think the move toward a post-oil world — at least one far less vulnerable to oil shocks — is accelerating because of the Iran war, and it's never too early to start reshaping our brains to prepare for such a profound change.
Cheers,
Paul