The war in the Middle East, the effective closure of the Strait of Hormuz and attacks on energy facilities is creating an oil shock with the head of the International Energy Agency (IEA) warning the world is facing a worse energy crisis than the twin oil shocks of the 1970s and the fallout of the Ukraine war combined.
Iran on March 25 dismissed an American 15-point plan to pause the war in the Middle East and replied with its own shorter tougher version, but White House Press Secretary Karoline Leavitt insisted the Washington and Tehran are in ongoing talks even as Iranian officials deny it. “Talks continue. They are productive, as the President said on Monday, and they continue to be,” Leavitt told a White House briefing, warning that, “If Iran fails to accept the reality of the current moment, if they fail to understand they have been defeated militarily and will continue to be, President (Donald) Trump will ensure they are hit harder than they have ever been hit before.”
Iran’s attacks on regional energy infrastructure along with its restrictions on the Strait of Hormuz, a critical Gulf waterway through which about one-fifth of the world’s oil and liquified natural gas (LNG) supplies transit, have sent oil and gas prices skyrocketing.
“The only way the oil and gas market returns to pre-war conditions is Iran capitulates and the regime is completely changed with a western facing administration. Either that or the U.S. forces withdraw and end attacks against Iran. Neither are at all likely,” Chris Weafer, CEO of Macro-Advisory, the leading independent strategic business consultancy in the Eurasia region, told NE Global on March 25 from Istanbul, adding that much more likely is that the U.S. employs ground forces — now en route to the Gulf — to seize the coastal areas of Iran around the Strait of Hormuz and then to create some sort of safe passage for shipping and to provide a missile and drone buffer between Iran and the Gulf states. “That now appears to be the much more likely outcome. It would mean that while missile strikes will be greatly reduced, the threat will not be entirely eliminated, and legacy risk will stay for a long time,” Weafer said.
“Insurance companies will be very reluctant to provide cover where there is any residual risk and while the U.S. and other countries could provide sovereign insurance cover, tanker operators will be very wary of placing crew, tankers and reputation at risk for a very long time,” he said.
“If the U.S. does seize the Strait and install its military as a permanent buffer, the flow of oil and gas will take time to recover, probably into next year at least, because of the need to repair damage and because of tanker operator fears. It means that, over the short term the price of Brent could easily hit $150 per barrel, or higher, if/when the US forces land in Iran to take the territory around Hormuz,” Weafer said, adding that assuming they are successful, the price should then fall back but will remain well above the pre-war levels because of legacy risk.
“I assume a range of $80-$90 Brent within a few months of the Strait reopening under U.S. military control but no lower for at least one year,” he said, adding that the other legacy of this war is that energy importers will want much greater supply source and route diversification in the future.
Yemen’s Iran-aligned Houthi movement said it stands ready to strike enemy targets in solidarity with Tehran, Reuters reported on March 26.
Trump announced on March 27 that he is postponing plans to start destroying Iranian energy plants by another 10 days, claiming talks with Tehran were going well.
The head of the IEA, which announced earlier in March plans to release of 400 million barrels of oil from emergency stockpiles, said the energy crisis caused by the Iran War exceeded the 1973 and 1979 oil shocks and gas shortages stemming from Russia’s 2022 invasion of Ukraine put together.
IEA Executive Director Fatih Birol was quoted as saying at the National Press Club in Australia on March 23 that LNG supplies had been reduced by about 140 billion cubic meters and at least 40 energy assets in the region are severely or very severely damaged across nine countries. “The global economy is facing a major, major threat today, and I very much hope that this issue will be resolved as soon as possible,” Birol said.
“If needed, we can put more oil in the markets, both crude oil and products, if it is needed,” the head of the IEA said. “Our stock release will help to comfort the markets, but this is not the solution. It will only have to reduce the pain on the economy.”
Birol noted that in addition to oil and gas, if some of the vital arteries of the global economy for petrochemicals, fertilizers, sulfur and helium are all interrupted, it would have serious consequences for the global economy. “The single most important solution to this problem is opening the Hormuz strait,” Birol said.
There is also wide concern about damage caused by the Iran war to refineries, oil fields, gas plants, ports and other energy infrastructure in the Middle East that may take a long time to repair.
On March 24, QatarEnergy declared force majeure on some of its LNG supply contracts, including for customers in Italy, Belgium, South Korea and China. Last week, QatarEnergy CEO Saad al-Kaabi said an Iranian attack on Qatar’s Ras Laffan gas facility wiped out about 17 percent of the country’s LNG export capacity, causing an estimated $20 billion in lost annual revenue. Saad al-Kaabi told Reuters that two of Qatar’s 14 LNG trains, the equipment used to liquefy natural gas, and one of its two gas-to-liquids facilities were damaged in Iranian attacks. The repairs will sideline 12.8 million tonnes of LNG production per year for three to five years, he said.
