Energy shock, global tremors: Who pays the price?

Ongoing supply disruptions, threatened international corridors, and rising concerns — driven by geopolitical tensions in the Middle East — have created a global crisis that has extended beyond political and military frameworks into global energy markets. The US–Israel–Iran war has triggered the worst global energy crisis, surpassing those of 1973, 1979, and 2022.

With escalating tensions in the Strait of Hormuz — a strategic maritime passage linked to one-fifth of global oil exports — and attacks on energy facilities in the Gulf region, prices have fluctuated and anxiety has risen among governments, energy companies, and consumers worldwide. Threats to shipping routes and production facilities have directly affected prices, insurance, and transportation, slowing supply flows, amplifying repercussions, and turning energy into a tool of pressure in international relations that impacts the global economy as a whole.

Many economies around the world that depend on energy imports have already been affected, particularly in Asia, including China, Japan, and India, and in Europe, including Germany and France. Energy vulnerability was already a European weakness even before the Iran war, but rising oil and gas prices and global supply disruptions have intensified concerns. Electricity prices in Europe are significantly higher than in the United States and China, and some factories may shut down as operating costs exceed economic viability.

In the United States, the situation differs. The shale oil revolution has reduced the need for imports, transforming the country into a major energy exporter, granting it resilience against supply and demand fluctuations in energy markets. The war may even enhance its export capacity amid difficulties in sourcing energy from the Middle East. At the same time, however, Washington has not been immune to global surges in the prices of goods and services, including fuel, which could trigger a new wave of inflation worldwide and have political implications for public approval and elections.

Asia, which relies on the Middle East for approximately 60 per cent of its oil needs, has also been affected. However, for Russia, the war has represented an opportunity, benefiting from exemptions to US sanctions to compensate for the shortfall in Middle Eastern energy supplies. China, by contrast, has been less affected than its neighbours due to its planning, diversified energy sources, and strategic reserves.

The Iran war demonstrates that energy is an existential issue. With every crisis, many countries — particularly low-income nations dependent on external energy sources — find themselves in a critical situation. Their capabilities do not allow them to meet energy needs at reasonable prices or to invest in new energy sources. Meanwhile, high-income countries face the risk of industrial decline under competitive pressures and the need to keep pace with advanced technologies, especially as these industries consume large amounts of energy.

Concerns about energy security, alongside climate change, have driven a shift toward clean and renewable energy. The current crisis marks the second major disruption in global energy markets within less than five years, following the Ukraine crisis in 2022. Wind energy, solar power, and green hydrogen can be produced from local sources, while nuclear energy appears as a viable option within a diversified mix of conventional, clean, and renewable sources to ensure energy security and reduce vulnerability to shocks in international supply markets.

With growing reliance on electric vehicles and clean alternatives, countries unable to invest sufficiently in clean energy — particularly amid rising interest rates — are turning to coal as the fastest and least costly solution, despite its environmental impact. Others rely on natural gas as a cleaner but more expensive option, alongside renewable energy sources.

The closure of the vital Strait of Hormuz serves as a wake-up call to the world about international energy shocks, prompting a rethinking of the massive oil flows that fuel economies. This may drive an even greater expansion of renewable energy than climate change considerations alone. Renewable energy is no longer a distant option in light of escalating geopolitical tensions and the need to insulate energy flows and global shipping from conflict.

Despite efforts by some countries to release record levels of global strategic oil reserves to counter rising prices, there has been no significant shift in market dynamics, although it may have somewhat tempered price surges. According to the International Energy Agency, more than 12 million barrels per day of supply have been lost due to the Iran war, the closure of the Strait of Hormuz, and attacks on energy facilities. These losses surpass all previous energy crises, with approximately 20 per cent of global liquefied natural gas production from Qatar disrupted. The disruption has extended to jet fuel and diesel. What distinguishes this crisis from previous ones is that supply shortages are affecting Asia, Europe, and Africa alike, and disruptions have extended beyond oil to include natural gas, LNG, and refined fuels.

The easing or end of geopolitical tensions does not necessarily mean a rapid return to stability in global markets. There are logistical challenges: vessels congested in the Gulf will take considerable time to clear, and the effects of the war are evident in disrupted supply chains. Countries will not be able to restore stable flows quickly, particularly amid uncertainty regarding control of the Strait of Hormuz and questions surrounding its future management.

Restoring market balance requires rebuilding confidence in the global energy market. This, in turn, requires clarity regarding the war and its trajectory, ensuring freedom of navigation through international corridors, addressing logistical bottlenecks in the Middle East, increasing production by energy-producing countries to compensate for shortages, restoring energy flows to the arteries of the global economy, and considering international partnerships that guarantee the sustainability of energy flows away from geopolitical tensions.

The crisis has exposed the fragility of global energy markets. Despite technological advancements and efforts to diversify energy sources, the world remains far from achieving a stable energy mix that can withstand disruptions to any single source. This implies continued vulnerability to future crises whenever international transit routes are disrupted or energy infrastructure is threatened. It underscores the urgent need for rapid diversification and the establishment of an international framework that guarantees global energy security while recognising geopolitical tensions as a primary driver of energy crises.

Hessa Abdulla Al Nuaimi is an Assistant Researcher at TRENDS Research & Advisory