The Strait of Hormuz has effectively been shut since early March. The International Energy Agency called it the largest supply disruption in the history of the global oil market. Oil prices have spiked. Gas prices are climbing. Inflation fears are back. But, all of this could just be for starters. The bigger risk is what comes next; what economists call ‘demand destruction’.

What is demand destruction?

Demand destruction happens when high prices force people and businesses to buy less. It sounds abstract, but it’s very concrete. We’re starting to see it already in fuel rationing in emerging market economies. Demand destruction means fewer cars sold, fewer homes bought, fewer restaurant meals, fewer business investments and eventually fewer jobs. And, because this crisis is more about than oil, demand destruction appears across the economy – not just in the energy sector.

This process has already begun in the UK. Smaller airlines are cancelling unprofitable routes as jet fuel prices soar. If the Iran conflict continues and energy prices go substantially higher, this could cause permanent damage and long-term structural change in large economies.

The seven channels of demand destruction

Understanding how demand destruction develops – its key channels, their signals and sequencing − means being better able to manage risk in business operating environments, supply chains and markets.

In an energy price shock, demand destruction unfolds through seven distinct routes, including: fuel, confidence, major household purchases, monetary policy and commodities. The first six channels relate to oil prices. The seventh is linked to commodities.

1. Spending is diverted

When oil prices spike, the additional cost acts like an immediate tax on every household and business. At current prices, the extra £16.5bn spent on fuel alone this year could account for as much as 0.5% of UK GDP. That’s money that isn’t being spent or invested elsewhere. Economists call this the ‘purchasing power drain’. The damage doesn’t stop there. Instead, it triggers a chain reaction.

2. Sentiment turns negative

When people see fuel prices rising and hear bad news about the economy, they start to worry and confidence falls. Consumers cut back on discretionary ‘fun’ spending, like dining out, travel and shopping. Historically, consumer confidence drops in the first month, then by 20−30% within 2−3 months of every major oil shock.

3. Consumers postpone big-ticket purchases

Cars and homes are the most sensitive categories to the big purchases freeze, which happens around 2−3 months into a crisis. When people are worried about the economy and paying more for fuel, they put off buying a car or taking out a new mortgage, especially as mortgage rates have jumped by a percentage point or more.

4. Businesses react to falling demand and higher costs

Businesses feel the squeeze around 3−4 months in. With diesel now around £2 per litre, the cost of shipping has gone up. Companies respond by delaying investments, freezing hiring and eventually cutting staff − especially in transportation, manufacturing, agriculture, retail and hospitality.

5. The Bank of England’s policymakers act

After 5−6 months, if oil price shock-driven inflation forces the Monetary Policy Committee (MPC) to raise interest rates or pause a loosening cycle, it makes borrowing more expensive and deepens the slowdown. If the MPC does nothing, inflation could spiral. This trade-off between doing nothing and raising rates is the classic stagflation dilemma. The MPC will act if the situation becomes more severe. But, for now at least, we think it’s more likely the MPC will keep rates on hold unless fuel prices go much higher.

6. Consumption choices change

If prices stay high, people will change their behaviour permanently after around 8−10 months. They buy electric vehicles, lock in remote working arrangements and invest in energy efficiency. After the 1979 oil shock, UK oil consumption took nearly a decade to return to its pre-crisis level. This type of demand destruction doesn’t improve when prices come back down.

7. The lasting impact of commodity supply-chain damage

On top of all this, the commodity channels − food prices rising because fertiliser is scarce, chip production slowing because helium is unavailable, industrial costs climbing because sulphur and natural gas are disrupted − add another layer of pressure. Standard oil price-GDP modelling approaches completely miss this. These channels start immediately, but have the longest tail. Even once shipping through the Strait of Hormuz resumes, the physical damage to gas plants, refineries and fertiliser manufacturing facilities will take months or years to repair.

Why timing matters for economies

The depth and degree of demand destruction depends on how long the Strait of Hormuz stays closed.

Each scenario in our comparison produces a different peak. This reflects when accumulated pressure is most intense, which also affects the recovery timeline.

In a quick resolution to energy supply-side shocks, demand destruction would peak early and fade fast. Only the fast commodity channels – like fuel and confidence (stages one and two) – have time to fire.

In a prolonged crisis, the peak doesn’t arrive until October or November because slower channels – like monetary policy decisions and business costs (stages four and five) – keep piling on. By then, consumers have pulled back, car sales have dropped, businesses are cutting investment, the BoE is stuck and food prices are rising from fertiliser shortages. Here, all seven channels are firing and reinforcing each other.

That compounding is what separates a painful quarter from a potential recession. Plus, even after the shipping lane opens, the damage doesn’t instantly reverse. Oil prices take months to normalise. The physical infrastructure damage could take 3−5 years to fully repair. That would keep food prices and industrial costs elevated well into 2027.

Yet, there are some buffers here. The UK economy uses about 40% less oil per pound of GDP than it did in 2011. Electric vehicles are growing fast and remote working has reduced households’ exposure to higher commuting costs.

Inflation expectations are also better anchored now than they were in the 1970s due to the decline of collective bargaining. Households are entering the crisis with historically high saving rates. This means there’s scope to offset some of the hit to real incomes by reducing saving, reducing damage to the economy compared to previous energy shocks.

However, none of these buffers have ever been tested against a disruption this large and one that hits this many commodities at once. If the Strait of Hormuz stays closed beyond this summer, then the probability of a UK recession will almost certainly be higher than 50%.

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