Iran war’s energy impact forces world to pay up, cut consumption

The war in the Middle East has triggered a nightmare scenario for the global energy system, slashing so much supply that consumers around the world must both pay up big and lower consumption.

The effective closure of the Strait of Hormuz, a narrow channel along the Iranian coast, has stopped the passage of 20 per cent of the world’s oil and liquefied natural gas (LNG) since the US and Israel began air strikes on Iran on Feb 28.

Meanwhile, ongoing strikes by Iran and Israel have targeted Middle East energy infrastructure, doing damage to gas fields, oil refineries and terminals that industry representatives say will take years to repair.

All of that adds up to what the International Energy Agency has already called the worst global energy disruption in history, eclipsing even the Arab oil embargo of 1973 that caused fuel shortages and triggered widespread economic damage.

“You’re not going to conserve your way around this. What it’s going to translate to are price rises high enough that people stop consuming,” said Mr Dan Pickering, chief investment officer for Pickering Energy Partners.

So far, the crisis has removed about 400 million barrels – about four days of world supply – from the market, triggering price increases of around 50 per cent.

Oil, gas and their refined by-products are critical to many parts of the modern world – from fuelling cars, trucks and planes to powering homes and industry to producing plastics and fertilisers.

“The breadth of what is at risk here in fuels, chemicals, LNG and fertiliser inputs is what makes this moment qualitatively different from previous episodes of Gulf tension,” said Mr Aditya Saraswat, senior vice-president at consultancy Rystad Energy.

Energy price shocks also fuel inflation, hitting consumers and businesses hard. This has become a major political liability for US President Donald Trump as he seeks to justify the war to the American public.

Mr Trump has assailed NATO allies over their lack of support for the US-Israeli war against Iran, calling the long-time US allies “cowards”.

Price shock

Global benchmark oil prices have already risen more than 50 per cent to over US$110 a barrel since the war started. The impacts are more pronounced for Middle East crudes – a staple for Asian economies – with prices hitting records near US$164.

This has translated to soaring prices for transport fuels, pressuring consumers and businesses across the globe, and triggering government action to conserve supplies.

Thailand, for example, ordered civil servants to conserve energy by suspending overseas trips and using stairs instead of lifts, while Bangladesh closed its universities.

Sri Lanka has imposed fuel rationing, China has banned refined fuel exports, and the British government’s energy contingency plan includes a cut in speed limits to save fuel.

On March 20, the International Energy Agency (IEA) outlined other proposals to reduce demand, such as working from home and avoiding air travel, which has already been severely disrupted after the war forced the closure of key Middle Eastern hubs.

The IEA earlier in March agreed to make a record 400 million barrels of oil available from emergency stockpiles. But analysts say the measure is too small since 400 million barrels cover only about 20 days of the war’s impact.

J.P. Morgan analyst Natasha Kaneva said reducing demand is the only solution when supplies fall short.

“The market is facing an acute shortage of products... that cannot be consumed simply because they are not available,” she said.

For everything that remains, prices are surging.

Jet fuel prices in Europe, for example, hit a record of around US$220 per barrel – a cost that is likely to filter down fast in the form of more expensive airline tickets.

In the US, which imports very little Middle Eastern oil, retail petrol prices are up more than a dollar a gallon since Feb 28 to around US$4 per 3.8 litres.

Natural gas prices in Europe and Asia are soaring after tit-for-tat strikes by Israel and Iran in recent days slammed Gulf gas installations. Consumer power costs could also leap.

Israel struck Iran’s South Pars gas field on March 18, and Iran hit Qatar’s massive Ras Laffan LNG complex the day after. QatarEnergy chief executive Saad al-Kaabi told Reuters that Iranian attacks will knock out 12.8 million tonnes per year of LNG – about 3 per cent of world supply – for three to five years.

The situation is critical since oil and gas products are vital to everything from pharmaceuticals to plastics and fertilisers, said Mr Menelaos Ydreos, secretary-general of the International Gas Union, a grouping of world gas producers.

“We, again, call for an immediate stop to the targeting of energy facilities and for the resumption of cargo traffic through the Strait of Hormuz as fertilisers, petrochemicals for the pharmaceutical industry, oil, grain and gas are all critical to our existence,” he said in a statement.

Food threat

The war also threatens food supply. It has severely disrupted fertiliser markets because about a third of global trade in fertilisers typically passes through the Strait of Hormuz and is now stuck.

Prices for nitrogen-based products like urea, the most critical fertiliser product, have risen 30 per cent to 40 per cent since the conflict began. US farmers were already reporting empty shop shelves ahead of spring planting.

Fertiliser factories in India, Bangladesh and Malaysia are moving to halt orders, cut production or shut down altogether because of a lack of feedstocks.

If the conflict lasts just a few more weeks, global food supplies will be significantly disrupted, said Dr Maximo Torero, chief economist with the UN’s Food and Agriculture Organization.

“This will affect planting... There will be a lower supply of commodities in the world – of staple cereals, of feed, and therefore of dairy and meat,” he said.

About half the world’s food is grown using fertilisers, which in some countries account for up to half the cost of grain production. REUTERS