Insurance costs have skyrocketed, as missiles fly across continents and oil tanks stall.
People around the globe are asking themselves the same question. Are we about to enter another global energy crises?
Energy markets in Asia and Europe have been shaken by the conflict between Iran, Israel, and the United States.
Gas prices in Europe are soaring, oil has risen, and shipping routes, which account for an important share of fuel used around the globe, have suddenly become dangerous.
This is the world’s biggest energy chokepoint
This time, the Strait of Hormuz is at its epicentre.
The narrow, inland waterway that connects the Persian Gulf to global markets carries a quarter of all oil in the world and around 20% of LNG exports. That’s almost 20 million barrels per day of crude.
Tanker operators reacted when shipping insurance suddenly increased from $200,000 to almost $1 million per voyage.
Marine insurers canceled coverage after several vessels near the Strait were damaged. The traffic slowed down dramatically.
The energy markets responded immediately. Brent crude rose to around $80 a barrel.
After fears about LNG supplies intensified, and after regional strikes temporarily stopped production in Qatar, European gas prices soared by more than half in just a few days.
The problem isn’t oil, it’s that there is no more oil. Oil that is stuck in one place and cannot be moved.
Why hasn’t the price of oil exploded?
Oil prices are still far lower than they were during recent crises.
Brent crude soared to $130 a barrel when the Russian invasion in Ukraine caused Europe’s energy crisis in 2022.
It is currently trading at around $80.
The market’s appearance before the war is part of the answer.
The oil supply was comfortable. Some traders expected even a slight oversupply in this year.
Tankers storing large volumes of Iranian crude and Russian crude sat in storage.
These barrels are now a kind of cushion.
Emergency reserves are another stabilizing factor. Following the 1973 oil crises, many countries began building strategic petroleum reserves in coordination with the International Energy Agency.
All member states must stock up on emergency supplies for 90 days.
These buffers were not available during previous crises.
The energy markets also have changed a lot since the 1970s.
Oil used to produce about one-quarter of the world’s electricity. It accounts for less that three percent today.
The electricity we use today is a mixture of coal, gas, and renewable energy sources.
Oil shocks still matter. The system is not affected in the same manner.
The real danger: shipping disruption
It isn’t a lack of oilfields that poses the greatest risk. The main risk is not a shortage of oil fields, but a blocking in the transport system.
The Strait of Hormuz is the main route for crude exports from the Persian Gulf. Oil can quickly accumulate when tankers are stopped. Some countries are unable to store oil and have cut back production.
Iraq’s production has been reduced by around 1.5 million barrels a day, as it is unable to store crude. Similar reductions in production could be seen across Gulf exporters if shipments are blocked.
Fuel markets would be affected quickly by the consequences.
Prices of gasoline, diesel and jet-fuel tend to move faster than the price of crude oil itself. This is because refiners are facing immediate supply shortages.
Rarely do consumers buy crude oil. Consumers buy refined petroleum products. Inflation follows a sharp rise in these prices.
What countries are the most affected?
Rarely do energy shocks affect all economies in the same way. The extent of exposure depends on the import dependency and origins of imports.
Asian industrial economies are at the forefront. China, the largest oil consumer in the world, relies on Middle Eastern supplies.
India imports approximately 5 million barrels of oil per day. Most comes from Gulf producers like Saudi Arabia, Iraq and the United Arab Emirates.
India has already asked for a temporary exemption from the sanctions to allow it to import more Russian crude oil after disruptions in supply threatened refinery operations.
Japan and South Korea are also at risk. They both import almost all their fossil fuels, and heavily rely on the shipments that pass through Hormuz.
Gas markets remain vulnerable in Europe, even though Europe is a step away from immediate shock. After the Ukraine War, Europe replaced a large portion of its Russian gas pipeline with LNG. Now, cargoes coming from Qatar and America fill the gap.
Already, the competition with Asia has begun to be felt. The competition with Asia is already visible.
The European levels of storage were also unusually low when the war began. If prices continue to rise, it could be expensive to replenish reserves in time for next winter.
Pressure on emerging economies
There are ripple effects that extend far beyond the major energy importers.
The war in Egypt threatens the revenue generated by the Suez Canal. This is a vital source of foreign exchange. Several shipping companies have rerouted around Africa’s Cape of Good Hope to avoid this region.
As capital flows reversed, the Egyptian pound fell recently to an 8-month low.
Cuba is also experiencing a new type of shock. The fuel shortages caused by supply disruptions, sanctions and transportation closures have resulted in rationing and power outages.
The financial buffers that larger importers have are not available to smaller economies.
The currency can be affected by even moderate increases in energy prices.
The global energy crisis is real
The history of energy crises shows that they are rarely caused by a single incident. Oil shocks in the 1970s were a combination of geopolitical tensions and structural supply restrictions.
After years of neglecting energy infrastructure and disruptions in nuclear, hydropower and other forms of power generation in Europe, the 2022 Crisis was a result.
Conditions today are very different.
The oil supply is adequate. Prices of coal have barely changed. The electricity markets are not in a panic. North American gas is abundant.
Strait of Hormuz is the real turning point.
The current situation will be manageable if tanker traffic returns.
The global market may lose as much as 20,000,000 barrels of oil per day if the waterway remains closed for several weeks or even months.
The term “global energy crisis” would then stop being a hypothetical.
The post Is the Strait of Hormuz Blockade causing a global energy crisis? This post may change as new information becomes available
