Strait of Hormuz Disruption Highlights Energy Risk for Businesses

Energy shocks have traditionally been viewed as a threat to the broader economy rather than a direct concern for corporate leaders. Many executives have seen energy risk primarily as higher fuel and electricity bills that lead to tighter margins and cost-cutting measures.

Fortune reported that this perspective is now outdated given the structure of modern business systems. The Strait of Hormuz carries a fifth of the world’s oil supply along with a significant share of liquefied natural gas. A closure linked to Middle East tensions would affect more than gas stations and household utility bills.

Higher costs would extend to freight, packaging, food and insurance while moving quickly through just-in-time supply chains, temperature-controlled warehousing and complex logistics networks. Data centers and cloud services require uninterrupted power.

The effects of a disrupted energy market now travel faster and further than in previous crises. This development positions energy security as both a business issue and a matter of public policy.

Governments have historically managed national energy security through diplomatic efforts and emergency planning. National resilience now depends on privately owned infrastructure and corporate decisions. Company survival and national resilience have become tightly linked as a result.

Markets can adjust over the long term. Companies must still navigate short-term disruptions. A manufacturer cannot wait a year for gas markets to normalize if key suppliers shut down in the current quarter, and retailers cannot absorb elevated freight costs during peak shopping season.

Many companies track their direct spending on electricity and fuel. Far fewer have mapped how an interruption in energy supplies would affect their full operations, including impacts on suppliers, customers further up or down the supply chain and end users.

A company can face significant exposure to energy volatility even when fuel and electricity represent only a modest share of direct costs.

Boards and executives should treat energy risk in the same manner as cyber risk. The issue requires regular stress testing as a strategic priority. Boards should direct management to model scenarios such as oil priced at $130 a barrel and identify which products become unprofitable, which suppliers fail first and which customers are placed at risk.

Companies should also build buffers in areas where disruption would cause the most damage. This may involve identifying alternate sources for key inputs, establishing backup power generation or arranging longer-term freight contracts. In strategic sectors, companies may need to coordinate with governments, utilities and key suppliers.

The objective is to create enough of a cushion that a temporary shock does not escalate into a business crisis. These measures carry costs, yet resilience investments often appear indispensable after a disruption occurs. The lesson from the current situation is that efficiency optimized for stable conditions can falter when markets become volatile.

Outperformance in the coming decade is likely to depend on the ability to maintain operations during periods of market volatility rather than solely on achieving lower costs.