The scale of the present shock is difficult to overstate. The effective closure of the Strait of Hormuz, through which roughly 20 per cent of global oil supply typically flows, has triggered what the International Energy Agency describes as the largest supply disruption in oil market history. Oil and gas prices surged above $100 per barrel and $18/MMbtu, with sharp daily swings driven as much by geopolitical headlines as by physical fundamentals. Production across the Gulf has been curtailed by millions of barrels per day, while tanker movements have been constrained by security and insurance limitations.
Even more telling is the behaviour of the market: prices spiked on escalation, then fell on rumours of de-escalation and then spiked again when reality reasserted itself. This is not a cycle. It is a condition.
Crucially, these shocks do not resolve quickly. Even if hostilities ease, the process of restoring supply — reopening shipping routes, rebuilding infrastructure, normalising trade flows — takes time. Markets may react in days. Physical systems recover in months or years.
Why traditional procurement is breaking down
Most large energy consumers still rely on a familiar three-part toolkit: fixed-price contracts, index-linked purchasing and hybrid or layered hedging strategies. These approaches have been designed for markets where volatility was episodic. They are far less effective in a market where volatility is continuous.
Fixed contracts deliver one thing extremely well: predictability. But in today’s market, predictability often comes at the cost of competitiveness. When prices fall, fixed buyers are locked into yesterday’s assumptions. Over time, this creates a structural disadvantage: paying above-market rates during periods of price decline, embedding supplier margins that are rarely transparent, and repeatedly ‘resetting’ contracts at moments of peak uncertainty.
Floating or index-based purchasing is in theory the most ‘efficient’ approach, fully exposed to market prices, with no embedded premiums. In practice, recent market conditions have shown why it is often untenable: prices doubling or tripling within months, extreme dislocations in refined product markets, and sudden liquidity constraints in physical trading.
Hybrid strategies attempt to bridge the gap, combining fixed and floating elements. But they introduce a different problem: decision risk. These strategies depend on timing the market correctly and adjusting positions dynamically while managing execution across multiple layers. Even well-resourced teams struggle to consistently outperform.
The real problem: one-way thinking
The deeper issue is not the tools themselves; it is the philosophy behind them. Most procurement strategies are one-directional: fixed strategies eliminate downside but sacrifice upside; floating strategies capture upside but expose downside; hybrids attempt to time the trade-off. All rely, implicitly or explicitly, on the ability to forecast the market. But in today’s environment, that assumption is increasingly untenable.
From price certainty to risk architecture
The more relevant question is no longer: What price should we fix? It is: What energy procurement strategy creates the right balance of stability and flexibility? Rather than choosing between fixed or floating, leading organisations are beginning to design procurement strategies around asymmetric outcomes:
- Protect against extreme price spikes.
- Retain exposure to falling prices.
- Avoid locking into a single market view.
This approach recognises that markets are unpredictable with persistent volatility, where careful flexibility has intrinsic value.
The hidden cost of getting it wrong
For large energy consumers, the consequences of procurement decisions are no longer marginal — they are strategic. Energy costs now directly influence EBITDA margins, competitive positioning, investment capacity and pricing power. A poorly structured procurement strategy can lock in elevated costs for multiple years, create earnings volatility, and reduce flexibility at precisely the wrong moment.
One example: a European industrial producer, long insulated by pre-2021 energy contracts, is now fully exposed to current market pricing for the first time in years. The result is a step-change in cost — an estimated £120–150 million increase in annual energy spend, equivalent to a significant share of free cash flow and double-digit EBITDA impact. What was once a stable, managed input cost has become a volatile and material financial risk.
Conclusion: The end of passive procurement
The current crisis is not just another energy shock. It is a signal that markets are structurally more volatile, supply chains are more fragile, and geopolitical risk is more persistent. And most importantly, the old assumption that prices will revert and stability will return can no longer be relied upon.
Energy is no longer just a cost input. It is a core financial risk variable. Procurement can no longer be passive. It must be designed — not to predict the market, but to perform under uncertainty.