Could War in Iran Spur a Global Energy Crisis?

The attacks on Iran by the U.S. and Israel—and the subsequent soaring oil and gas prices—may have many wondering whether the world is in for another energy crisis like what was experienced in the 1970s. More than 50 years ago, a number of Arab state members of the Organization of Petroleum Exporting Countries (OPEC) cut oil production and limited exports to certain nations in protest of the United States’ support for Israel in the Yom Kippur War. The move caused a global oil crisis, and triggered an oil shortage in the U.S., which at the time imported more than a third of its oil. The price of oil nearly quadrupled, and shortages in the U.S. caused panic buying at the pump and impacted everything from home heating to inspiring the introduction of road speed limits. The Iranian Revolution in 1979 then sparked a second oil shock. One of the big differences between now and then, however, is that before the 1970s oil crisis, very few countries had security stocks of oil, a practice many nations changed in its aftermath. The IEA, which was formed in the aftermath of the crisis to help coordinate a collective response to major disruptions in the supply of oil, today recommends that member countries have at least 90-days supply of oil in reserve. The U.S. also, as a result of the crisis in the ‘70s, introduced its Strategic Petroleum Reserves. But now a long-term closure of the Strait of Hormuz is driving fears over a severe increase in oil prices. Iran borders the Strait of Hormuz—a key shipping route that connects the Persian Gulf with the Gulf of Oman and the Arabian Sea. “It’s a very narrow choke point, and if it’s closed, or if passage is restricted, there’s no other way out,” says Jim Krane, energy research fellow and Middle East specialist at Rice University’s Baker Institute.  President Trump has signaled that the war in Iran could last four to five weeks—or go “far longer.” If tensions in the region continue, it could cause major disruptions to global energy markets and trigger widespread inflation. As of Tuesday morning, prices for Brent crude oil reached as high as $83 per barrel. After Qatar halted production on Monday, daily freight rates for liquified natural gas (LNG) ​tankers jumped more than 40%. “This is going to have a wide effect on energy markets, not just in the Middle East or in Asia, but a little bit in Europe as well,” says Karen Young, senior research scholar at the Center on Global Energy Policy at Columbia University.  Read more: As Oil Tankers Come Under Attack, Experts Fear for Global Trade Through Strait of Hormuz A fifth of global oil production, a fifth of LNG shipments, and a third of global trade flows out of the strait every day. Attacks have already damaged several oil tankers passing through the strait, and a number of major shipping companies have paused transit through the route. On Tuesday, an Iranian official said the country will “set fire to anyone who tries to pass through” the Strait of Hormuz, the BBC reports.  Lower supply will lead to higher prices, which will be felt hardest in Asia, where a number of countries, from India to South Korea, are reliant on the oil and gas produced in the Persian Gulf.  This impact could be experienced by people in myriad ways, says Krane: “More than 90% of global transportation uses oil as fuel to move cargo or passengers or fly planes or ships, or you drive your car—that all requires oil.” “Plastic is based around oil or natural gas, heating, air conditioning, cooking, all that stuff,” he continues. “So all that gets more expensive when there’s a shortage or when supplies are constrained.” While we might see a shortfall of about 10 million barrels of oil a day in the coming weeks, Young says that there are some factors that will prevent a major shortage. “Saudi Arabia sent a lot of oil to customers in Asia and then put it in storage. So they’re stockpiled a bit,” she says.  She also notes that some counties might be moved to reconsider sanctioned oil. “There’s a lot of tankers that have taken sanctioned oil from Russia and from Iran and have not been able to place it, but it’s sitting in the ocean on these tankers,” she says. “So you can imagine that there’ll be some pricing and perhaps some incentives for people to buy that oil too.” The biggest opportunity for instability, Young says, is with natural gas prices. “We just don’t have a lot of other sources of LNG sitting around,” she says; 90% of LNG shipments that pass through the Strait of Hormuz head to Asia. South Korea has already launched an emergency response to prepare for potential energy impacts.  The impact on the U.S. is likely to be limited considering the country is a large exporter of LNG, according to analysis from Goldman Sachs.  If the conflict goes on much longer, we could also see further inflation. “Everything you buy and consume has an energy signature,” says Krane. “When the price of energy goes up, it pushes up the price of everything else.”  This comes as Trump’s tariffs have already boosted U.S. inflation by 0.7 points, pushing prices higher for American consumers, according to data from the National Bureau of Economic Research.  The uncertainty is causing climate groups, including Greenpeace International, to renew calls for countries to boost up energy security through investments in renewable energy. It’s a move many countries considered when Russia invaded Ukraine—it forced Europe to focus on renewable energy. The bloc now spends 10 times more money investing in clean energy than it does in fossil fuels. At a day-to-day level, rising prices could be felt at the pump too, potentially spurring consumer changes, says Krane. “If you can’t get oil out of the Strait of Hormuz, you’d much rather be driving an electric vehicle.”