Source: Fortune
Summary
The Iran war highlighted the global reliance on the Strait of Hormuz, a critical waterway for oil and gas exports. After Iran threatened to block the strait, Asian countries imposed import restrictions and rationing. Despite initial fears of energy crises, prices and supply remained stable due to increased production and stockpiles. Iran recently announced a revenue-sharing deal, but U.S. tensions persist. Experts warn that the global energy system is shifting toward more resilient supply chains as countries diversify sources.
Our Reading
The numbers tell one story.
Iran’s threat to block Hormuz forced Asia to act quickly.
Stockpiles and production kept the market from collapsing.
Now, the world is rethinking energy security.
Global energy is still a tool of geopolitical power.
Author: Evan Null
A ‘big wake up call’
Before the war, roughly a fifth of the world’s oil trade passed through the Strait of Hormuz, which sits between Iran and Oman. More than 80% of that cargo was bound for Asia, primarily China, India, Japan, and South Korea.
“Before this crisis many market observers would have told you it would be impossible to block or completely close the Strait of Hormuz, because a country like Iran did not have the capabilities. They tried in the 1980s, but they did not succeed,” says Carole Nakhle, CEO at Crystol Energy, an energy consultancy.
Yet the conflict has shown “how easy and inexpensive it has become to threaten very expensive energy infrastructure,” she added, with relatively cheap drones capable of putting refineries, pipelines, ports, and other multibillion-dollar facilities at risk.
“This has been the big wake-up call for the entire global energy industry. It’s a fundamental paradigm shift of the last 50 years of the energy industry,” says Kavonic. “We’re moving from just-in-time supply chains to just-in-case supply chains.”
Energy importers are starting to diversify. Before the war, the Middle East accounted for 90% of Japan’s crude oil imports, and roughly 11% of its liquefied natural gas. “Japan found it was more vulnerable than expected, particularly when it comes to LNG—it imports 100% of its energy,” says Kavonic.
Escaping an energy collapse
Things didn’t collapse as analysts feared at the beginning of the conflict. In April, for example, the head of the International Energy Agency predicted that flights may soon need to be grounded in Europe due to jet fuel shortages.
While oil prices did surge to as high as $126 per barrel, they didn’t hit the $150 to $200 a barrel level that some analysts feared. And while several Asian countries imposed emergency measures to conserve fuel, a lengthy and catastrophic shortage never materialized. “The global market is proving to be more resilient to major supply shocks than many thought,” Kavonic says.
One reason was the sheer amount of oil sitting in reserve. The IEA mandates that its 32 member countries stockpile at least 90 days’ worth of oil; similar mandates for gas stockpiles were imposed after Russia’s invasion of Ukraine.
In March, the agency coordinated the release of 400 million barrels from these emergency oil stockpiles, the largest such intervention in its history.
Oil producers like the U.S., Saudi Arabia and the UAE also increased their production and carrying capacity. Yet perhaps the unsung hero in the market was China, which drew on its huge stockpiles, leaving more oil in the market for other economies.
Escaping an energy collapse
“OPEC has lost its primary role as global oil market manager,” Kavonic says, referring to the cartel that tries to maintain the global prices of oil. “It’s now moved to China.”
He notes that China’s increased leverage in oil markets will have repercussions throughout the Pacific. “We can see how dependent Pacific Island nations are on diesel to keep the lights on. So we’ve seen countries in Asia not just have to manage their own imports but support the Pacific as well. Otherwise 30 years of Pacific policy could be undermined in a few months.”
But how long this will last is unclear, particularly now that tensions between Iran and the U.S. have flared up again, and a prolonged closure of the Strait of Hormuz now looks likely.
“We spent the last four months living on the oil market credit card. And if we continue at that rate, that credit card will be maxed out in a few months,” Kavonic says.
Fortune will host several sessions on what a more complicated geopolitical world means for Asia’s businesses at the upcoming Fortune Leaders Forum, hosted in Macau on Sep. 8. Learn more here.
