The substrate problem
The IEA filed another “largest in the history of the global oil market” last month. They’re burning through superlatives faster than crude.
Brent surged 65% in March.
Global oil output is projected to fall 6.6% in Q2 – the largest quarterly drop since the COVID lockdowns shut the world down on purpose.
Tanker traffic through Hormuz collapsed from around seventy a day to fewer than fifteen.
The Strategic Petroleum Reserve, originally created in 1975 for exactly this scenario, is currently being used for… I don’t know… just about any other scenario. Seven consecutive weekly drawdowns. And then the most recent one, 8.6 million barrels, clocking in as the largest single week on record. With nearly half of the released crude being exported because that’s what’s called capitalism.
Economies are contracting.
They haven’t decided to use less energy.
The energy dropped off stage right, and the productivity tumbled with it.
I’ve seen this one. I remember the original. The reviews were not kind.
In October 1973, the OAPEC cut production and the embargo pulled somewhere between seven and ten percent of global supply – the numbers are still disputed fifty years later. Oil quadrupled from $2.90 to $11.65 in three months. The decade that followed gave the English language the word “stagflation” because nothing in the existing vocabulary fit.
Same story then.
Same story now.
But that mechanism runs in the opposite direction from what most economics textbooks will teach you.
They will tell you that the economy grows, and then because it grows, it uses more energy. As if “the economy” is a creature that wakes up, lifts some weights, builds an appetite, and orders a barrel of crude for breakfast.
My position is that that causality runs the other way.
Cheap energy enables productivity → productivity grows output → more output means “THE GREATEST ECONOMY EVER”™.
But pull out the energy, and watch the productivity drop, and the GDP following it down the stairs. The correlation is there for anyone (but the economists) to see. The causality is not what they’ll tell you it is.
I ain’t quibbling about some modelling. Not this time, I promise!
It is a fundamental flaw in the “science” of economics, air quotes included.
When reality gets reversed, the policy conclusions come out reliably backwards, and the people running monetary policy are surprised by oil shocks every so often like clockwork.
Let me show you what I mean.
Global GDP per capita ran roughly flat from year zero to about 1800. Eighteen centuries of essentially nothing. Hovering near a thousand dollars in modern terms, generation after generation, give or take a plague. If that doesn’t sound like a long time to make no progress, I don’t know what is. Performance reviews must have been brutal.
The standard explanation is that people were less clever back then. They lacked the knowledge. They were waiting for the right minds to be born and the right ideas to crystallise.
The clearest evidence of this faulty reasoning is Hero of Alexandria.
Around 70 CE, give or take a decade, Hero built a working steam turbine. He called it the aeolipile. A hollow bronze sphere, mounted to rotate, two bent nozzles, water heated underneath, jets of steam spinning the sphere on its axis.
It worked.
It demonstrated, in physical form, the principle that James Watt would commercialise seventeen centuries later.
Hero wrote it up as device number fifty out of seventy-eight in his Pneumatica.
As far as anyone can tell, it was used to teach physics and to amuse priests. It opened no doors. It pumped no water. It just sat there… Spinning…
Or take the Antikythera mechanism. Around 150 BCE, somebody in the Greek world built a bronze-geared analog computer that calculated astronomical positions, eclipses, and the four-year Olympic cycle.
We found it in a shipwreck off a Greek island in 1901.
The equivalent technology wouldn’t reappear in Europe for fourteen centuries. Some progress, it turns out, is just retrieval.
The Romans ran sixteen water wheels in cascade at Barbegal in southern Gaul, grinding flour for the city of Arles.
The Chinese had gunpowder, the magnetic compass, movable-type printing, paper currency, and the wheelbarrow centuries before any of those things reached Europe.
The brains were there.
The curiosity was there.
The mechanical understanding was there.
So why did none of it tip into an industrial revolution?
Because nobody had a reason to industrialise.
Why invest in a machine that does the work of ten men when you already own ten men?
Slaves were cheaper than tinkering.
The ancient world ran on muscle, and the muscle was already paid for.
Hero could have built his aeolipile into a pump and changed the world. He built it into a teaching aid for the priests instead. Rational, given his incentives. Tragic, given ours.
Imagine that he did. The aeolipile became a pump. The pumps drain the mines deeper. Cheaper silver expands the money supply. The Antikythera technology spawns a Hellenistic watchmaking industry. The Romans run their grain mills on coal – which they knew about and used for specialty heating.
We could have been a thousand years ahead of where we are!!
What changed in seventeenth-century England was not the arrival of cleverness. It was the arrival of a problem. The English had spent centuries doing what humans do best when nobody is stopping them, which is chopping down every tree they could reach.
By the 1600s the country was running out of forest. No Karen to see…
Iron production was bottlenecked. Glassmaking was bottlenecked. Heating was bottlenecked. Wood was getting expensive in a way that wood is not supposed to.
The English had to find an alternative or accept industrial regression.
Coal existed. Coal had always existed. The Romans burned it for specialty applications. The Chinese had been mining it for three thousand years.
The problem was that the easy coal was already gone, and the remaining seams sat under the water table. Every mine, sooner or later, flooded.
In 1712, Thomas Newcomen built a steam-powered atmospheric pump to drain the flooded mines. It was enormous and burnt about a tonne of coal per horsepower-hour, which sounds inefficient until you remember that the alternative was the mine being unusable.
Sixty years later, James Watt added a separate condenser and dropped fuel consumption by roughly seventy-five percent. By 1800 Britain had over two thousand five hundred of these things running.
That’s it. That’s the moment. Not because Newcomen and Watt were smarter than Hero. Because they had cheap coal under their feet, and the cleverness humans had been accumulating for two millennia finally had an obstacle to crush.
Once the energy was cheap, everything that had been waiting got built.
Steel, because you could now run a blast furnace continuously. Chemistry, because you could now boil enormous volumes of liquid without going broke. Electricity, telegraphy, refrigeration. Antibiotics, eventually. Computers, much later. None of these were possible without an underlying energy density that nobody had ever previously had access to. The Renaissance had the brains. The 1750s had the brains plus the fuel.
The difference is two centuries of compounding civilisational change.
ENERGY AS THE RIVER OF CIVILIZATION
I wrote about this from the thermodynamic angle in “Energy as the River of Civilization”. The short version is this: civilisations rise where energy concentrates and decline where it dissipates. The energy density ladder runs from about 75 watts of human muscle, to 750 watts of horse, to 24 megajoules per kilogram of coal, to 42 of oil, to roughly 80 million for uranium fission. Every rung up that ladder is what enabled the next leap in complexity. Coal gave us steam. Oil gave us liquid-fuelled transport. Fission gave us baseload power so dense that a fingertip-sized pellet contains the energy of a tonne of coal.
The West climbed that ladder for two hundred years.
Then the West decided to climb back down.
Germany shut its last nuclear reactors in 2023 and replaced the lost capacity by burning lignite. Brown coal. The dirtiest, lowest-density form of fossil fuel that exists. The country that gave us Kant, Goethe, and most of the thermodynamic laws themselves decided thermodynamics was negotiable when there was virtue to be performed.
California closed Diablo Canyon, then half-uncancelled it, then closed it again, depending on the week.
Vermont shuttered Vermont Yankee.
The replacement strategy is solar at roughly 10 watts per square metre, compared with about 1,000 watts per square metre for the natural gas plant it’s notionally replacing.
This is, technically, a regression toward muscle.
Meanwhile, China refuelled its operational thorium molten-salt reactor in April 2025 without shutting it down. Nobody had ever done that before. The original blueprints sat in Oak Ridge archives since the 1960s – Americans built it, ran it, abandoned it because thorium didn’t produce weapons-grade plutonium. China dusted off the schematics and made them work. The West had the technology. The West gave it up. China owns it now.
Thirty conventional Chinese reactors are under construction. The US has two. Chinese clean generation in Q1 2025 exceeded the entire American total by a factor of three. China’s electricity consumption grew 8.6% year-on-year while European clean generation actually declined. The ladder still exists. Some people are still climbing it.
Which brings us back to the current moment.
Iran declared the Strait of Hormuz closed. The strait normally carries around twenty-five percent of the world’s seaborne crude trade and a similar share of LNG.
Insurance withdrawal did most of the closure work. Vessels are technically free to transit, like you’re technically free to take a bath in lava.
The Saudi and Emirati bypass pipelines can move maybe five and a half million barrels a day combined. The strait was carrying about twenty before. That math ain’t mathing…
Iran issues transit permits to vessels owned by specific countries – China, Russia, India, Pakistan, the Philippines, on payment of around two million dollars per ship. Every finance YouTuber promising passive income should be studying this!
Maersk pulled out entirely. Container traffic re-routed around the Cape of Good Hope, adding weeks to delivery times. India raised fuel prices for the first time in four years. European diesel inventories have a few weeks of supply left.
The IEA called for its largest-ever coordinated emergency stock release. I’m sure I mentioned already somewhere that they need new superlatives?
Art Berman has been pointing out that the rate of loss is something like a hundred times greater than the 1979 shock.
The Dallas Fed thinks global GDP growth could lose 1.3 percentage points if Hormuz stays compromised for three quarters. I think that’s cute.
Brent touched $120 at the peak. The World Bank’s base case has it averaging $86 for the year and warns of a $95-$115 scenario if the disruption persists. Their high-end disruption scenario would actually require Brent to fall??
The IEA’s executive director called the combined situation “the greatest threat to global energy security in history”, though at this rate I feel ‘history’ is starting to mean ‘since the last press release’.
Markets are treating this as an oil price story. “Look at the futures curve”, they say. “Look at the energy-sector equities”, they say. Listen to the CNBC anchors fretting about whether $90 Brent prices in the Iran risk or not.
It is not an oil price story.
It is a productivity story.
If five percent of the global energy budget structurally goes offline – and that is roughly the order of magnitude we are looking at if Hormuz access stays degraded for the medium term – that’s not five percent more expensive transport.
That’s five percent off the dinosaur juice the entire productivity machine runs on. It doesn’t slow proportionally. It seizes, and never where the models said it would.
In 1973 we lost roughly the same fraction of supply and produced a decade of stagflation, two oil-importing-country debt crises, the permanent collapse of Bretton Woods, and a fundamental reordering of the global political economy. None of those outcomes are in the 2026 bingo cards.
The textbooks – and the IEA – will figure it out eventually. They’ll probably call it the “greatestestest surprise everever never seen before”. Because… why the hell not? All the other superduperlatives have been used up.
Innovation needs fuel.
Cut the budget, and you cut the future.
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Published to The Liberty Beacon from The Falling Darkness
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