- The Middle East war and closure of the Strait of Hormuz—a route for about 20% of global oil and LNG trade—triggered a sudden shift from expected energy surplus to severe supply disruption and soaring prices.
- The shock threatens inflation and slower economic growth, with analysts warning oil could reach $200 per barrel.
- Governments are responding by pursuing energy security and self-sufficiency, accelerating nuclear, coal, and renewable energy while trying to reduce reliance on imported fossil fuels.
The Middle East war and the mother of all oil shocks—the de facto closure of the Strait of Hormuz—have exposed the global dependence on and as buyers scramble for cargoes and consumers once again bear the brunt of spiking energy prices.
Before the war, the world had just overcome the energy system disruption from the Russian invasion of Ukraine and the embargoes on Russian energy in most of the developed economies. Some thought this was the biggest energy shock this decade, and most governments placed energy security ahead of any climate or net-zero goals, betting that non-Russian oil and gas would be more than sufficient to meet the still growing demand.
From Glut to Shortage
For a while, it was.
Just a month ago, global oil and gas supply was abundant. Oil and LNG producers were ramping up exports, and the markets and analysts prepared for a glut in both the oil and gas markets.
But then all that changed overnight.
The Strait of Hormuz, the world’s most vital oil and LNG chokepoint through which 20% of global oil and LNG trade passes, has been off limits for nearly two weeks, wreaking havoc on global markets and energy prices.
The shock of soaring oil and gas prices is set to result in spikes in inflation and slowing economic growth, analysts have started to warn.
And governments have come to realize that the massive dependence on Middle East supply is untenable when the shock is so big.
Many countries and analysts were complacent that a closure of the Strait of Hormuz is unlikely to happen, considering that Iran needs the passage, too, to continue exporting its sanctioned oil, mostly to China.
But the Iranian regime is now playing for survival amid an existential threat to the Islamic Republic, and all bets on further escalation are off.
“US$200/bbl is not outside the realms of possibility in 2026,” Wood Mackenzie analysts said earlier this week.
Routes to bypass the Strait of Hormuz are being activated, but these routes cannot come close to replacing the Strait of Hormuz in full, Amy Myers Jaffe, Director of NYU’s Energy, said on a WoodMac podcast.
The routes via the Red Sea do not help Iraq or Kuwait. They carry no LNG, either, and for refined products, there is no pipeline alternative at all, the analysts noted.
Oil prices were nearing $100 per barrel early on Thursday, even after the IEA announced its biggest-ever coordinated release from oil stocks since it was created in 1974 during the Arab oil embargo.
More than fifty years later, the latest war in the Middle East is now making the case for oil and gas-consuming countries to reduce dependence on imported fossil fuels and look to strengthen their self-sufficiency in energy supply, where possible.
“The dramatic supply disruptions and price spikes unleashed by the latest Middle East conflict are likely to harden the resolve of many governments to accelerate the drive for greater energy self?sufficiency – and that will include clean energy,” Reuters columnist Ron Bousso wrote.
India and China are boosting coal consumption and production, developed north Asian economies are likely to boost nuclear power and renewable energy rollout, and Europe will seek to continue raising the share of clean energy supply.
Homegrown Energy
Fossil fuel importers are scrambling to boost the share of non-oil and gas power generation. South Korea, for example, is accelerating the restart of nuclear reactors that are currently under maintenance, with six reactors in total expected back online by the middle of May. The country is also considering reactivating mothballed coal power plants, while President Lee Jae-myung called for a speedier transition to renewable energy.
In India, the Ministry of Coal said the country is “ready for any unprecedented demand for coal” with a total stock of around 210 million metric tons, which would be sufficient for about 88 days of demand.
In Europe, the priority is accelerating clean energy while the EU considers a potential cap on natural gas prices, European Commission President Ursula von der Leyen said on Wednesday.
In theory, accelerated deployment of domestic solar, wind, and batteries would reduce dependence on fossil fuels for power generation.
But the spike in fossil fuel prices to four-year highs doesn’t make a great case for faster renewables rollout, as the resulting surge in inflation and potentially higher-for-longer interest rates would raise the costs of clean energy materials and installations.
In addition, the rise in renewable capacity additions would not mean anything if they struggle to connect to the grid. Today, global investments in grids are about $400 billion per year. If the world is to meet the expected growth in power demand through 2030, it would need to boost annual grid investment by about 50% from $400 billion, the International Energy Agency (IEA) said last month.
Renewables, of course, cannot replace fossil fuels in many industries, including chemicals, and there remains the issue of intermittency and dependence on weather.
Still, the Middle East war is likely shifting the energy dilemma debate from affordability to energy security and self-sufficiency.
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