War could cause the biggest oil crisis in history, says expert

The US and Israeli war against Iran is quickly turning into a global energy crisis, as the de facto closure of the Strait of Hormuz forces major oil producers to begin cutting production.

The seeds of the crisis date back to the late 1970s, when Iranian oil workers went on strike and revolution ushered in the Islamic Republic, wrote Daniel Yergin, vice president of S&P Global and author of The Prize: The Epic Quest for Oil, Money and Power, in an opinion piece published in the Financial Times this weekend.

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“One of the legacies of all this has been the nightmare scenario of the oil flowing through the Gulf being disrupted by a prolonged and destructive war,” he added. “The fear? That this would result in a spike in energy prices that would send the world economy plunging into a deep recession. Since the war with Iran began a week ago, Tehran has done everything it can to make that a reality.”

Indeed, crude oil prices have soared 36% in the last week as Iran’s attacks on ships in the Strait of Hormuz — through which 20% of the world’s oil and liquefied natural gas passes — have all but closed the narrow waterway.

With the Persian Gulf’s major oil producers unable to export their crude, they have begun pumping less as storage capacity has already been exhausted.

Iraq has reduced production by 60%, to between 1.7 million and 1.8 million barrels per day, from around 4.3 million barrels per day before the war. Kuwait and the United Arab Emirates also decreased production.

Meanwhile, the LNG market suffered a shock as Qatar was forced to reduce the pace of production. Yergin highlighted that spot prices in Asia, which relies heavily on LNG, have nearly doubled since the start of the war, while natural gas prices in Europe have risen by about 50%.

“But the worst-case scenario would be severe damage to infrastructure and a prolonged closure of the strait,” he said. “This would fuel fears of long-term supply shortfalls.”

Iran has already begun targeting the oil infrastructure of its Gulf neighbors, although air defense systems have so far avoided serious damage. At the same time, US and Israeli airstrikes hit a major refinery near Tehran that supplies fuel to the civilian economy and military.

It’s true that the global economy is very different than it was during the oil crises of the 1970s, with a technological revolution in the sector turning the U.S. into an energy powerhouse while major energy-importing countries have become more resilient, noted Yergin.

“Right now, the world is facing the largest disruption in oil production in history, as well as a significant shock to global gas markets. The main question for global energy markets now is how long this explosive war will last,” he said.

So far, the US and Iran have shown no signs of backing down. President Donald Trump has demanded “unconditional surrender” and wants a say in who will be Iran’s next supreme leader. Iran has vowed to keep fighting while broadening its targets to include civilian infrastructure such as desalination plants that supply most of the Gulf’s water supply.

Wall Street is also not convinced that Trump can restore shipping traffic in the Strait of Hormuz. He announced a $20 billion reinsurance program for oil tankers and said the U.S. Navy would escort ships through the strait if necessary.

But the US and its Gulf allies have struggled to shoot down Iran’s Shahed drones, which have already struck several key military targets.

“Trying to protect so many ships is a huge logistical challenge,” wrote Robin Brooks, a senior fellow at the Brookings Institution, in a note published on Substack on Friday.

“All Iran needs to do is get a few drones through to blow up a ship, and we’ll go from what is now a very serious incident to a massive oil shock. In short, I don’t think U.S. assurances of naval escort are all that credible. There are simply too many tankers that need to be protected.”