War in Iran Could Have ‘Historic’ Disruptions on Energy Markets

The U.S. and Israeli war against Iran is disrupting energy markets and driving oil and gas prices higher in the United States and globally. While those increases are modest so far, experts say the war has the potential to cause more severe and lasting impacts if Iran damages the region’s energy infrastructure or restricts shipping through the Strait of Hormuz.

Already, the three-day-old bombing campaign has killed hundreds of people in Iran, including the country’s leader, Ayatollah Ali Khamenei.

Iran has retaliated by hitting a broad range of targets across the region, including oil and gas sites. On Monday, Saudi Arabia’s Ministry of Energy said its Ras Tanura oil refinery sustained “limited” damage after the interception of two drones. QatarEnergy said Monday it was halting production of liquefied natural gas, or LNG, after military attacks on two facilities.

About one-fifth of global oil and LNG supplies pass through the Strait of Hormuz, a narrow waterway connecting the Persian Gulf with the Arabian Sea. On Sunday only five oil tankers moved through the strait, according to S&P Global Energy, compared with about 60 per day before the war.

Analysts say global markets can withstand these types of cuts over the short term—global oil prices were up about 7 percent Monday compared to the day before bombing began. But the conflict also has the potential to cause “the largest oil supply disruption in history,” said Jim Burkhard, vice president and head of crude oil research at S&P Global Energy, in a note.

“If the reduction in tanker traffic continues for a week or so it will be historic,” Burkhard wrote. “Beyond that it would be epochal for the oil market with prices rising to ration scarce supply and impacts in financial markets.”

Any lasting disruptions could prove even more meaningful for global gas markets, said Daniel Sternoff, senior fellow and head of corporate partnership strategy at Columbia University’s Center on Global Energy Policy. Countries generally have smaller inventories of gas than oil to cushion disruptions, Sternoff said, though the impacts would be most pronounced in Asia and Europe. The United States is the world’s largest gas producer and a net exporter, so he said consumers would be somewhat insulated.

The biggest question now, Sternoff said, is whether Iran damages oil and gas facilities around the region.

“All of this looks like a deliberate Iranian choice to escalate really quickly against its neighbors and to try to use world energy markets and prices as a pressure point,” Sternoff said, referring to the attacks in Saudi Arabia and Qatar. “We are really quickly into a really dangerous phase here of which there is no precedent.”

A sustained increase in crude oil prices will push up the price of gasoline, too. And unlike with natural gas, American consumers are not insulated from the global oil market, experts say. Even though the United States is a net exporter of oil, refiners still import large volumes of crude.

If prices remain elevated for no more than a couple of weeks, there may be little lasting impact, said Alan Krupnick, a senior fellow and director of the industry and fuels program at Resources for the Future, an environmental and energy think tank. But if high prices hang on for months, Krupnick said, that could have ripple effects that cut both ways with respect to climate change and fossil fuel output.

Higher gasoline prices could, over time, push more consumers toward electric vehicles, Krupnick said. But they would also create an incentive for U.S. oil companies to drill more. Domestic oil output fell for the second consecutive month in December, the most recent data available, according to the U.S. Energy Information Administration, and had plateaued in the months before that. 

Some environmental advocates have argued that the war’s impact on energy markets highlights the volatility of fossil fuel markets and underscores the need to transition to cleaner sources of energy. As it is, they argue, the attack on Iran will drive up energy costs for consumers everywhere.