Oil Price Shock: Impact of Iran War on Global Energy Markets

The energy shock stemming from the Iran war differs significantly from the one caused by the Russia-Ukraine conflict. While the latter was primarily driven by sanctions and rerouting of energy flows, the current crisis involves a physical blockage of the Strait of Hormuz. This has led to substantial supply disruptions, with flows through the strait collapsing from 20 million barrels per day to a trickle. Alternative pipeline routes offer limited spare capacity, and the global LNG market is already tight, making it difficult to compensate for the immediate shortages. The International Energy Agency (IEA) assesses that the current episode is the largest supply disruption in the history of the global oil market. Persistent high prices will likely force consumers and industries to curb their consumption, affecting energy-intensive sectors and household disposable income. For Gulf Cooperation Council (GCC) states, this poses an existential challenge to their role as reliable suppliers.

The closure has cut off approximately 20% of global LNG trade, leading to shortages and price increases.

Releasing strategic petroleum reserves may have a limited effect due to logistical constraints and the physical outage of supply.

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