The Iran War showed how much the world relied on you narrow, 20 mile wide waterway. Shortly after the United States launched attacks on Iran, it threatened to attack ships attempting to cross the Strait of Hormuz, which carries much of the Middle East’s oil and gas exports. There is a risk of bottlenecks led countries across Asia to impose export bans, cut import tariffs and ration fuel to maintain supplies.
Six months since the start of the war Doomsday scenarios– Price spikes, long lines at gas stations, power outages and flight bans – have not had a full impact, with increased production and high inventories mitigating some of the damage.
It appears that some form of normality may be returning to the Strait. Iran announced on Wednesday a new revenue sharing agreement over the waterway, although a military spokesman accused the United States of “hindering this process.”
But the revelation of how easy it was for Iran to block and continue to block one of the world’s most important waterways is pushing governments to diversify their energy sources.
And now, with the prospect of a near-term US-Iran deal on life support and Iranian control of Hormuz Now it looks safe What saved the global oil market in the first half of the year may not work again in the coming years.
“Global oil and gas supplies are still an important geopolitical lever,” said Saul Kavonic, head of energy research at MST Financial. “Despite the rise of alternative and environmentally friendly technologies over the last decade, the global economy is still heavily dependent on oil and gas.”
“Hostile actors can threaten to do this for geopolitical reasons.”
A “big wake-up call”
Before the war, about a fifth of the world’s oil trade passed through the Strait of Hormuz, which lies between Iran and Oman. More than 80% of this cargo was destined for Asia, primarily China, India, Japan and South Korea.
“Before this crisis, many market observers would have told you that it was impossible to block or completely close the Strait of Hormuz because a country like Iran didn’t have the capacity. They tried in the 1980s, but they didn’t succeed,” said Carole Nakhle, CEO of Crystol Energy, an energy consulting firm.
But the conflict showed “how easy and inexpensive It poses a threat to very expensive energy infrastructure,” she added, with relatively cheap drones capable of endangering refineries, pipelines, ports and other multi-billion dollar facilities.
“This was the big wake-up call for the entire global energy industry. It is a fundamental paradigm shift of the last 50 years of the energy industry,” says Kavonic. “We are 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 around 11% of Japan’s liquefied natural gas. “Japan has discovered that it is more than that more vulnerable than expected“Especially when it comes to LNG – it imports 100% of its energy,” says Kavonic. “If the LNG doesn’t arrive in Japan, the lights will go out and the country will shut down.”
Now Tokyo is investing elsewhere to secure future supplies. Japanese company Inpex, for example, formed a joint venture to expand its LNG investments in Australia’s Northern Territory.
“It’s boom time for Woodside and Chevrontwo major LNG suppliers that are not too focused on the Middle East. The big oil companies are now also rapidly increasing their investments in LNG,” says Kavonic, and sees an opportunity for buyers to do so diversify their sources of gas from the Middle East.
Exporters are also diversifying. The key lesson for oil exporters was the need to invest in alternative supply routes. This includes pouring billions into developing ports on the western side of Saudi Arabia and in the Gulf of Oman, virtually bypassing the strait entirely. So are oil producers Investments in pipelineslike that of Saudi Arabia East-West pipeline. If all of this additional investment is worthwhile, only 10% of the world’s oil would need to travel through the Strait of Hormuz, down from 20% before the war.
Far more than oil, gas could become the key energy commodity impacted by a prolonged closure of the Strait of Hormuz. While crude oil can be transported via pipelines – perhaps from oil producers in the Persian Gulf to ports on the western side of the Arabian Peninsula – gas cannot, meaning there are no alternative routes to transport LNG to Asia if Hormuz is blocked.
Qatar, one of the world’s leading producers of LNG, is trying to find a way to keep its export routes open through diplomacy, attracting new customers and taking advantage of rare opportunities to source its product through Hormuz. A rapid recovery timeline has also been established so that production can resume once the strait reopens.
Escaping an energy collapse
There was no collapse, as analysts had feared at the start of the conflict. In April, for example, the head of the International Energy Agency predicted that flights in Europe may soon have to be suspended due to a shortage of jet fuel.
Oil prices rose to as much as $126 a barrel, but did not reach the $150 to $200 a barrel feared by some analysts. And although several Asian countries took emergency measures to conserve fuel, protracted and catastrophic shortages never occurred. “The global market is proving to be more resilient to major supply shocks than many thought,” says Kavonic.
One reason for this was the sheer amount of oil that was in reserve. The IEA requires its 32 member countries to stockpile oil for at least 90 days; Similar restrictions on gas supplies were imposed after Russia’s invasion of Ukraine.
In March, the agency coordinated the release of 400 million barrels from these emergency oil reserves, the largest intervention of its kind in its history.
Oil producers such as the USA, Saudi Arabia and the United Arab Emirates also increased their production and transport capacities. But maybe the unsung hero In the market was China, which used up its vast reserves, leaving more oil on the market for other economies.
“OPEC has lost its primary role as global oil market manager,” Kavonic says, referring to the cartel that tries to maintain global oil prices. “It has now moved to China.”
He notes that China’s increased influence over oil markets will have implications across the Pacific. “We can see how dependent the Pacific island is Nations run on diesel to keep the lights on. So we have seen that countries in Asia need to not only manage their own imports, but also support the Pacific. Otherwise, 30 years of Pacific policy could be undermined in a few months.”
But how long this will last is unclear, especially now that tensions between Iran and the US have risen again and a prolonged closure of the Strait of Hormuz is likely.
“We have lived there for the last four months Credit card for the oil market. And if we continue like this, the credit card will be maxed out in a few months,” says Kavonic.
Fortune will host several sessions on what a more complicated geopolitical world means for Asian companies at the upcoming Fortune Leaders Forum, taking place on September 8 in Macau. Find out more here.