War’s energy impact forces world to pay up or cut usage
The war in the Middle East has triggered a nightmare scenario for the global energy system; cut supply so much that consumers around the world had to pay both greater and lower consumption.
The virtual closure of the Strait of Hormuz, a narrow channel along the Iranian coast, has stopped the passage of 20 percent of the world’s oil and liquefied natural gas since the United States and Israel began airstrikes on Iran on February 28.
Meanwhile, ongoing attacks by Iran and Israel have targeted the Middle East’s energy infrastructure, damaging gas fields, oil refineries and terminals that industry representatives say will take years to repair.
All of this adds up to what the International Energy Agency is already calling the worst global energy shortage in history; It dwarfs even the 1973 Arab oil embargo that caused fuel shortages and triggered widespread economic damage.
“You’re not going to get your way on this. What that means is prices are going to rise enough that people stop consuming,” said Dan Pickering, chief investment officer of Pickering Energy Partners.
So far the crisis has caused around 400 million barrels (about four days’ worth of world supply) to be withdrawn from the market, triggering a price increase of about 50 percent.
Oil, gas, and their refined byproducts are critical in many parts of the modern world, from fueling cars, trucks, and airplanes to powering homes and industry to producing plastics and fertilizers.
“The breadth of what is at risk here across fuels, chemicals, LNG and fertilizer inputs is what makes this moment qualitatively different from previous periods of Gulf tensions,” said Aditya Saraswat, senior vice president at consultancy Rystad Energy.
Energy price shocks also fuel inflation, hitting consumers and businesses hard. This has become a major political liability for US President Donald Trump, who has tried to justify the war to the American people.
Trump attacked NATO allies for their lack of support for the US-Israeli war against Iran, calling longtime US allies “cowards.”
Global benchmark oil prices have risen by more than 50 percent since the start of the war, reaching over US$110 per barrel. The effects are more pronounced for Middle Eastern crude oils, a staple of Asian economies; prices are reaching records around US$164.
This has led to transportation fuel prices rising, putting pressure on consumers and businesses around the world, and governments taking action to preserve supplies.
The International Energy Agency on Friday outlined other proposals to reduce demand, such as working from home and avoiding air travel, which was already severely disrupted after war forced the closure of major hubs in the Middle East.
The IEA agreed in early March to obtain a record 400 million barrels of oil from emergency stocks. But analysts say the measure is too small, with 400 million barrels covering only 20 days of the war’s impact.
JP Morgan analyst Natasha Kaneva said that when supply is insufficient, reducing demand is the only solution.
“The market is facing a severe shortage of products that cannot be consumed simply because they are not available,” he said.
Prices are rising for everything else.
In Europe, for example, jet fuel prices reached a record high of around $220 per barrel; this cost is expected to decrease rapidly in the form of more expensive flight tickets.
Retail oil prices in the United States, which imports very little Middle Eastern oil, have risen by more than a dollar per gallon since Feb. 28 to around $4 per gallon.
Natural gas prices in Europe and Asia are rising rapidly after recent tit-for-tat attacks by Israel and Iran hit gas facilities in the Gulf. Consumer energy costs could also jump.
War also threatens food supplies. It has severely disrupted fertilizer markets because about a third of the global fertilizer trade usually passes through the Strait of Hormuz and is now stuck.
