No matter how much longer the United States and Israel\u2019s war with Iran lasts, the world\u2019s energy system will be grappling with its consequences at least through the end of the year, if not for far longer. <\/p>\n
The biggest short-run effects of the Iran energy crisis will be felt in Asia, where economies that run on Persian Gulf oil and gas face shortages and higher prices. The supply shock has \u2014 and will \u2014 drive up prices, leading oil and gas producers who aren\u2019t stuck behind the Strait of Hormuz to seek higher returns. Much of the continent is already in the midst of an energy crisis, complete with fuel rationing and top-down policies to reduce oil and gas consumption.<\/p>\n
In Australia, gas stations are running out of diesel<\/a>. The government of the Philippines adopted a four-day workweek<\/a> to reduce commuting. Pakistan announced a two-week school closure<\/a>. Nepal is rationing cooking fuel<\/a>. Thailand\u2019s prime minister told civil servants to take the stairs<\/a>, and the government set air conditioning to a minimum 79 degrees Fahrenheit<\/a>.<\/p>\n Around the world, coal use is rising. Gasoline prices are on the way up<\/a>, even in the United States, which is a net exporter of crude oil and petroleum products. Even if the war were to end tomorrow, oil and gas markets are likely to remain tight for many months to come.<\/p>\n Just as the oil shocks of the 1970s transformed the economies of the then-rich world \u2014 spurring the takeoff of nuclear power to in Japan and France; pushing the U.S. to direct R&D funding and subsidies to solar and shale gas; motivating carmakers around the world to developer smaller, more fuel-efficient vehicles \u2014 so too will this crisis likely transform how the entire world structures its dependence on oil and gas. It maybe already has.<\/p>\n Let\u2019s take an industry-by-industry look:<\/p>\n Oil<\/p>\n The year began with a global oil glut. That has long since vanished. No matter what happens in Iran over the near to medium term, expect the oil market to remain tight.<\/p>\n Before hostilities with Iran ramped up, the consensus was that the market was \u201coversupplied,\u201d Greg Brew, an analyst at the Eurasia Group, told me. \u201cDemand growth was expected to be fairly sluggish. Production from OPEC states and the U.S. was expected to be fairly high, and prices were going to be in the $60s and potentially $50s [per barrel]. Obviously that is now completely out the door.\u201d<\/p>\n Both Goldman Sachs and Morgan Stanley analysts speculated that the Brent crude benchmark could hit or even exceed its 2022 high of around $122 a barrel. It might even break through its all-time high of around $150, reached in 2008, should the closure persist.<\/p>\n Even if the strait were to reopen tomorrow, it would leave a large \u201cair pocket\u201d in the oil market, Morgan Stanley oil analyst Martijn Rats wrote in a note to clients last week, referring to oil that will never come to market because of shut-in production. That would keep prices high through the second and third quarters of the year as supply catches up to demand.<\/p>\n Oil analyst and author of the Commodity Context newsletter Rory Johnston estimated that the size of this \u201cair pocket\u201d is in the hundreds of millions of barrels. \u201cInventory will start dropping like a rock\u201d over the coming weeks, he told me, \u201ceven if we could snap fingers and just go back to where we were two, three weeks ago.\u201d<\/p>\n That squares with what Brew told me, as well. \u201cEven when Hormuz reopens, the price band through the rest of the year is unlikely to fall below $75 a barrel, given the size of the physical disruption that we\u2019re experiencing,\u201d he said. A barrel of oil cost around $60 at the end of last year, before the price began to creep up as the U.S. gathered forces around Iran.<\/p>\n There will likely still be a \u201csustained risk premium\u201d for any tanker leaving the strait as long as the current Iranian regime remains in power, Brew said. \u201cThe most likely outcome from this war is one where Iran is weakened but has not collapsed \u2014 where it retains the capabilities to threaten traffic through the strait and to threaten [Gulf Cooperation Council] states.\u201d<\/p>\n Natural gas<\/p>\n A supply squeeze that could have resolved quickly once the Strait of Hormuz reopened and Qatar\u2019s Ras Laffan facility got up and running again turned into a years-long interruption when Iran knocked out 17% of Qatar\u2019s liquified natural gas export capacity<\/a>, taking out almost 13 million tons per year of gas production, according to Morgan Stanley. As recently as a month ago, Qatar supplied about a fifth of global LNG capacity. The damage will likely take several years to fix, the chief executive of QatarEnergy told Reuters<\/a>.<\/p>\n \u201cWhat started as a transitory (but significant) capacity outage has escalated to a multi-year loss of supply,\u201d Morgan Stanley analysts wrote in a note to clients Thursday. \u201cEven with near-term resolution, the global gas market will need to contend with refilling inventories amid a large supply loss, creating upside price risks.\u201d<\/p>\n European and East Asian LNG importers will likely choose to pay the higher prices. Poorer countries in South and Southeast Asia, however, may have to go without.<\/p>\n \u201cThere is now no longer going to be an LNG glut in 2026. There\u2019s going to be a tight gas market,\u201d Brew told me. \u201cThat\u2019s going to keep regional prices high. That\u2019s going to keep European prices high. That\u2019s going to keep Asian prices high. That\u2019s going to mean emerging markets in South Asia and Southeast Asia that would otherwise be able to buy LNG cargoes are going to have a tougher time.\u201d <\/p>\n Much of the rationing of electricity or the shutdown of fertilizer plants in South and Southeast Asia was already happening before this week\u2019s catastrophic attacks, the result of Qatar cutting off production due to earlier strikes.<\/p>\n No matter how long the war lasts, European and Asian gas buyers will have to refill their gas reserves before winter sets in again, which will further strain an already tight market. The Morgan Stanley analysts said prices are more likely to go up than down through the rest of the year even if there\u2019s deescalation soon.<\/p>\n Jefferies analyst Julien Dumoulin-Smith wrote in a note to clients Wednesday that \u201ceven if the disruption proves temporary, LNG\u2019s perceived risk profile has likely shifted structurally.\u201d <\/p>\n \u201cThe conflict has underscored how concentrated global LNG supply remains around a narrow choke-point. That realization alone may embed a higher risk premium in LNG pricing,\u201d he wrote. \u201cOver time, higher prices could slow demand growth among some price-sensitive buyers and alter how buyers assess long-term LNG investment decisions.\u201d<\/p>\n Coal<\/p>\n Just like in 2022, countries that suddenly find themselves short on natural gas will almost certainly turn to coal. \u201cMy sense is that this is going to be great for coal as 2022 was,\u201d Brew said, referring to the uptick in coal usage following the Russian invasion of Ukraine, which cut off a major source of natural gas supply for Europe.<\/p>\n In both Europe and Asia, the \u201ccoal equivalent\u201d price of gas has shot up, meaning that natural gas is now much more expensive on a dollars-per-unit-of-energy basis. This will incentivize switching to dual use gas and coal plants, or else bringing under-utilized coal-burning power plants into service, especially in Asia.<\/p>\n South Korea said earlier this week<\/a> that its nuclear and coal power plants could raise their output in light of reduced LNG availability. South Korea is heavily dependent on both fossil fuels and imported energy \u2014 84% of its energy supply is imported on net; almost 80% of its energy supplies are fossil fuels, and about 15% of its LNG imports<\/a> come from Qatar. <\/p>\n The energy consulting firm Wood Mackenzie estimated that coal-fired power plants in Japan and South Korea could offset 70% and more than 100% of their gas-fired generation, respectively. But, Wood Mackeznie noted, that\u2019s only in the current \u201cshoulder season,\u201d when mild weather means less electricity demand. \u201cIf disruptions persist into peak summer demand, the effectiveness of coal as a buffer will diminish, increasing exposure to tighter supply conditions.\u201d<\/p>\n In Europe, which invested heavily in renewables and gas imports<\/a> (largely from Norway and the United States) following the Russian invasion of Ukraine, coal\u2019s cost favorability to natural gas is improving, but overall demand has been falling as days get longer and warmer. In Germany, coal\u2019s share of electricity generation rose 2% in March<\/a> compared to February. <\/p>\n Solar, wind, and other forms of clean energy<\/p>\n