A global energy crisis is brewing because of the Iran war.
The energy implications of the conflict, which has been waging for well over six months, have long been clear.
Generic Oil Tanker Image. Image Credit: Creative Commons.
Iran’s proximity to, and subsequent control of, the Strait of Hormuz has been well documented, as have the ramifications for global energy prices.
However, as conflict drags on, so too have its implications, and concerns are once again rising over energy prices as a new front opens up.
Hormuz Crisis Continues
Since the war began in February this year, Iran has dictated what can and cannot pass through the Strait of Hormuz. The strait is a key passage for Gulf states including Bahrain, Kuwait, the United Arab Emirates and Qatar.
Approximately 20% of the world’s oil and gas passed through the waterway before the war began, but shipping traffic has fallen dramatically as Iran utilizes a chokehold to prevent the vast majority of shipping from passing through.
The day before the war began, 125 vessels passed through the strait; on Monday, just four made it through safely.
At its narrowest, the strait is 24 miles wide, meaning Iran can strike any vessel that attempts to breach its blockade.
Tehran has used this leverage to create economic uncertainty worldwide, increasing living costs across the world and limiting support for the U.S.-Israeli campaign.
In addition to missile strikes, Iran has planted sea mines throughout the Strait of Hormuz to deter commercial shipping from flouting its regulations.
The U.S. says it cleared these mines after a large minesweeping operation last month.
Saudi Alternatives
While many Gulf states rely on the Strait of Hormuz, Saudi Arabia’s size and existing infrastructure allow it to redirect oil exports through the Red Sea on the Kingdom’s western coast.
Through an east-west oil pipeline built in the 1980s amid fears of shipping disruption during the war between Iran and Iraq, Riyadh has been able to bypass the Strait of Hormuz.
Approximately 4-5 million barrels of oil have passed through each day so far this year, providing a luxury its Gulf neighbors don’t possess.
That’s all changed over the past few weeks following a renewed offensive by Houthi rebels in Yemen.
The Iranian-backed militia group has taken territory along Yemen’s coast, threatening disruption to shipping through the Bab al-Mandeb Strait – the Saudi Kingdom’s alternative waterway for oil exports.
The re-escalation has dragged Riyadh into a conflict it was keen to avoid.
Last week, Iranian proxy groups in Iraq targeted the country’s East-West oil pipeline, forcing it to close.
It’s not expected to reopen for at least three weeks. Moreover, Saudi’s Red Sea port of Yanbu has reportedly suspended oil loadings, raising further concerns over the Kingdom’s oil exports.
Supply Concerns
Saudi’s East-West pipeline has handled approximately 4% of the world’s oil supply in recent months, but the ongoing closure limits total supply.
Moreover, growing Houthi control in the Red Sea means further disruption is possible, with the group already threatening to continue operations until a Saudi blockade is lifted.
The rest of the Gulf is largely dependent on the Strait of Hormuz.
Qatar’s liquefied natural gas (LNG) exports can only sail through the strait with no meaningful land-based alternative – a similar frustration shared by Kuwait and Bahrain.
Alas, the only supplier in the Gulf with a feasible alternative is the UAE, which has its own pipeline into the Gulf of Oman and a second under fast-track construction.
Rapid Price Drop Unlikely
The months-long disruption in the Strait of Hormuz combined with recent attacks on Saudi infrastructure is dramatically raising the price of oil.
Brent crude, the general benchmark for oil prices, has remained above $100 a barrel for more than a week.
Charl Le Roux of MENA Strategic Watch in Dubai told The Media Line that markets are pricing both barrels physically removed from supply and the risk of what comes next.
“Brent crude is trading at $103.78 per barrel, up from approximately $70–73 before the conflict and near a weekly peak of $108,” said Le Roux. “Of the roughly $30 increase, an estimated $12–15 reflects confirmed supply losses, consistent with Goldman Sachs’ risk-premium framework. The remainder is an uncertainty premium linked to the conflict’s duration and expansion into the Red Sea, making a rapid decline unlikely.”
About the Author: Shay Bottomley
Shay Bottomley is a British journalist. He has written for the Western Standard, Business Insider, Maidenhead Advertiser, Slough Express, Windsor Express, Berkshire Live and Southend Echo.
