A closed Strait of Hormuz was once unthinkable

The view was that it just wasn't credible and would be seen as alarmist. How it works: The blind spot reflects a real-world version of the dismal theorem, coined by late Harvard economist Martin Weitzman.Originally developed in the context of catastrophic climate risk, the idea is that extreme, low-probability scenarios can overwhelm conventional analysis — and fall outside normal policy planning.The big picture: The Strait of Hormuz is the single most important chokepoint in the global energy system.It's a key economic artery for numerous products, including roughly one-fifth of the world's oil and liquefied natural gas.What they're saying: I never looked at a map as precisely as I have done in the last few weeks at the Strait of Hormuz, Patrick Pouyanné, TotalEnergies CEO, told Axios in a recent interview.It's part of the sea, anybody can navigate it.Since it's not a canal like the Suez or Panama, Pouyanné said, the potential for it to be closed was probably underestimated.Flashback: In 2007, a group of experts considered modeling a full closure — then rejected it.The discussion was, 'come on guys, it has to be credible. That could never happen,' Ori said on stage at a recent conference hosted by SAFE.Modeling it meant confronting an economic apocalyptic scenario, said Ori, who is now executive director at the University of Chicago's Institute for Climate and Sustainable Growth.State of play: That 2007 scenario took a year — and a less extreme disruption — to push oil to 165 a barrel.We're two months into this right now, Ori said last week of today's crisis, noting that oil prices were hovering around 100 a barrel and the stock market was not fazed.If this goes on for another three months, people's view of that is going to change.Catch up fast: Oil prices have surged again since Ori's comments, recently hitting 126 a barrel.Flashback (again): A 2022 task force led by representatives of countries that are part of the International Energy Agency also sidestepped a full Hormuz closure.The task force, convened to assess the best allocation of strategic oil reserves in the event of a crisis, didn't consider it for two reasons, said Landon Derentz, a member of the task force at the time while at the Energy Department.One, it had never happened before.And two, it was seen as requiring a global response beyond what the IEA could realistically coordinate, said Derentz, now at the Atlantic Council.Even if you convinced yourself maybe we should exercise it, the consequence of shutting the strait down was so significant that you couldn't really respond to it as an institution alone, Derentz said.It would require, at that point, a global response and scale of diplomacy that extended significantly past what is within the bandwidth of the IEA.The other side: An IEA spokesperson and a former top IEA official both said the agency has long considered the risks associated with a closed Strait of Hormuz in its emergency planning, including in 2019. Derentz said the 2022 task force was a separate exercise and focused specifically on the ability of countries' abilities to respond to an oil crisis with their existing reserves.Between the lines: Militaries have also extensively modeled the conflict risk around the strait — but usually separately from energy planners and economists, Derentz said.Reality check: The U.S. is better insulated than in the past.The U.S. economy is far less dependent on oil than it used to be, thanks to a few factors, including laws that have made cars more efficient.The U.S. is now the world's largest producer of oil and natural gas, the latter which provides a clear buffer from extreme price surges and shortages other parts of the world are experiencing.Yes, but: The world these models were built for has changed.The 2007 scenario was before drones, said Daniel Yergin, a leading energy expert who participated in that exercise. A cheap drone can now do enormous damage to a very large oil tanker.And geopolitical unpredictability — including more volatile U.S. foreign policy — makes extreme scenarios harder to prevent.The bottom line: The current disruption is testing not just global energy markets, but the assumptions behind how extreme risks are modeled — and who is responsible for planning for them.Disclosure: Amy is the inaugural journalism fellow at the University of Chicago's Institute for Climate and Sustainable Growth.