May 27 - Dallas Federal Reserve President Lorie Logan cautioned that a prolonged disruption of shipping through the Strait of Hormuz could require the world to reduce its consumption of oil and natural gas more sharply than has occurred to date.
Logan made the comment in remarks prepared for delivery to a Bank of Japan conference, saying Iran has restricted traffic through the narrow waterway during the three-month U.S.-Israeli conflict with Tehran. She said the moves have pushed higher prices for energy, food and fertilizer.
Before the war, roughly one-fifth of global oil and liquefied natural gas passed through the strait, Logan noted. With those flows now highly constrained, she warned that a sustained failure to restore shipping to prewar levels could require global oil and natural gas consumption to decline "more meaningfully than it has so far." She added: "The economic consequences would depend on the degree to which end users can switch to other energy sources or use energy more efficiently, versus curtailing economic activity."
Logan pointed to near-term limits on increases in U.S. output. A recent Dallas Fed survey of U.S. oil executives found respondents expect U.S. oil production to rise by only about a quarter of a million barrels per day this year and by roughly half a million barrels per day next year. That incremental supply contrasts with what Logan described as a drop in global oil availability of about 13 million barrels per day since the outset of the Iran war - a shortfall that has been largely addressed so far by drawing down inventories that she emphasized are finite.
"One way or another, I expect energy markets to come into rough balance before too long," Logan said. "If the molecules aren’t available, the world can’t consume them."
Logan also used the speech to focus on vulnerabilities in the Treasury market. In prepared remarks for a closed-press conference on Wednesday, she urged steps to strengthen market resilience, including centrally clearing the Federal Reserve's own Treasury securities trading and enhancing the Fed's liquidity toolkit beyond its standing repo operation. She noted that leveraged investors have taken on a growing share of Treasury holdings.
"Levered positions can unwind rapidly in the event of price or funding shocks," Logan said. "The Treasury market underpins government finance, the flow of investment, and the implementation and transmission of monetary policy. Its resilience deserves, and requires, ongoing effort and vigilance."
Logan was one of three Federal Reserve policymakers who dissented in last month's interest-rate decision. Those dissenting votes reflected a view that, given rising energy and other prices, policy guidance should signal that an increase in rates is as possible as a cut. In her prepared remarks at the closed-press conference, Logan did not offer near-term economic forecasts or further comment on monetary policy.
Context and implications
Logan framed the current situation as a combination of constrained physical supplies, limited immediate uplift in domestic production, and reliance on inventories to bridge gaps. Her remarks tied the energy shortfall discussion to market functioning, arguing that a resilient Treasury market and broader liquidity tools are important to manage the transmission of economic shocks that could stem from energy disruptions.