Dallas Fed President Lorie Logan stated on Wednesday that the world may need to find ways to reduce its reliance on oil and gas if the Strait of Hormuz remains closed for an extended period due to the U.S.-Israel conflict with Iran.
During the three-month conflict, Iran has blocked shipping through the Strait of Hormuz, leading to increased prices for energy, food, and fertilizer. Prior to the war, approximately one-fifth of the world's oil and liquefied natural gas passed through this waterway.
In prepared remarks for a Bank of Japan conference, Logan said, "In a situation of highly constrained supply, if shipping through the strait does not return to pre-war levels soon, global oil and gas consumption may need to decline more significantly than currently anticipated. The economic consequences will depend on the extent to which end-users can switch to other energy sources or improve energy efficiency, rather than reducing economic activity."
Executives from U.S. oil companies, in a recent Dallas Fed survey, indicated they expect U.S. oil production to increase by only 250,000 barrels per day this year and 500,000 barrels per day next year.
In contrast, global oil supply has decreased by approximately 13 million barrels per day since the start of the Iran conflict. Logan noted that this shortfall is currently being addressed mainly by drawing down limited inventories.
"Regardless, I expect energy markets to roughly return to a balance between supply and demand in the near future," Logan said. "Without physical energy supply, there can be no discussion of global consumption."
Logan was one of three Federal Reserve policymakers who dissented in last month's interest rate decision. They argued that, given rising energy and other prices, the U.S. central bank should signal that interest rate hikes are as likely as cuts.
In a closed-door press briefing on Wednesday, her prepared remarks did not include any near-term economic forecasts or comments on monetary policy.
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