Global oil and gas prices have surged as the Iran war has brought the crucial Strait of Hormuz, a narrow passage between the Persian Gulf and the Gulf of Oman through which around a fifth of global oil production flows, to a halt.
As of Tuesday, brent crude oil prices have risen by around 7%, reaching as high as $83 per barrel. When markets closed on Friday, ahead of the Iran war but amid rising tensions, the barrel cost was just over $73.
[time-brightcove not-tgx=”true”]European natural futures jumped by around 30% following the strikes in Qatar, a major exporter of the commodity. The price of natural gas in the U.S. was up by 5%.
Daily freight rates for LNG (liquefied natural gas) tankers jumped more than 40% on Monday after Qatar halted operations.
Serving as a global lifeline for the supply of oil and LNG, the Strait of Hormuz has long been positioned by Iran as a geopolitical bargaining point during times of conflict. With Iran controlling the Northern side of the passage, the country has the means to block vessels from journeying through and can disrupt trade by attacking shipping containers and tankers.
Read More: What Is the Strait of Hormuz?
An Iranian Revolutionary Guards senior official reportedly issued a warning over the crossing on Monday, referring to it as “closed.”
“If anyone tries to pass, the heroes of the Revolutionary Guards and the regular navy will set those ships ablaze,” said Ebrahim Jabari, a senior adviser to the Guards commander-in-chief, according to state media.
Iran appears to have targeted several oil tankers in a series of ongoing retaliatory strikes against Gulf countries in response to the U.S.-Israeli military operation that launched over the weekend and killed Iran’s Supreme Leader Ali Khamenei.
Iran’s Islamic Revolutionary Guards Corps on Sunday claimed three tankers from the U.K. and U.S. had been “struck by missiles” and were “burning.”
Elsewhere, a tanker called MKD VYOM, flying the Marshall Islands flag, was struck by the Gulf of Oman, near the entrance of the Strait, Oman’s Maritime Security Center reported. A Palau-flagged vessel called Skylight was also struck in a separate incident, Oman confirmed.
The U.K. Maritime Trade Operations confirmed that another vessel in the port of Bahrain had been struck by “two unknown projectiles causing a fire.”
Oil storage infrastructures and energy facilities are also at risk.
The Fujairah Oil Terminal in the United Arab Emirates encountered a fire after the successful interception of a drone Tuesday. The production at Ras Tanura refinery in Saudi Arabia and QatarEnergy’s LNG facility in Qatar have also been disrupted by strikes.
While Iran has not followed through on its threats to officially “close” the Strait, amid the widespread disruption, dozens of tankers are now waiting in nearby ports and along the coast of the UAE and Oman.
Many global shippers have responded by suspending operations in the area.
Large-scale Danish shipping company Maersk has paused all vessel crossings in the Strait until further notice, instead seeking alternative routes. As is often the case in such circumstances, they are now charging an “emergency freight increase to cover these constraints and increased operating costs.” Increased shipping prices are another significant sign of the impact on global trade.
“What we are seeing right now in the Strait of Hormuz is severe disruption,” says Noam Raydan, a senior fellow at The Washington Institute for Near East Policy, remarking upon the heightened “risk” of making the crossing.
Amid grave concerns about the functioning of the Strait of Hormuz given Iran’s position and the widening of the conflict, TIME spoke to experts about what the unrest means for global supply chains and consumer prices.
The surge of oil prices and impact on consumers
The supply of oil from a number of Gulf countries is at a relative standstill and markets have reacted with concern.
While drops in stock prices aren’t too sharp for now, Raydan says this will likely change if the disturbance to the flow of shipping vessels continues.
There is particular concern about the supply of Iraqi oil, she notes. Iraq produces the second highest volume of crude oil in the Organization of the Petroleum Exporting Countries (OPEC) behind Saudi Arabia.
While Iraq can export some of its oil to the north via a pipeline through Turkey, most crude oil moves through its southern port in Basra. “Iraq relies on Hormuz. If there’s complete disruption, they have no other outlet to export Basra’s crude oil,” says Raydan.
She notes that other producers such as Saudi Arabia and the UAE also have alternative routes to export oil, but their capacity cannot match that of tankers. “Can these pipelines be an alternative for the volume of oil that they export through Hormuz? Absolutely not,” she argues.
The increase of oil prices is inevitably going to be passed on to the consumer, too.
Jim Krane, a fellow for energy studies at Rice University’s Baker Institute for Public Policy, says “when shippers’ costs go up, this is folded into the price at the pump that consumers pay in a market.”
According to Krane, only consumers in countries where the government regulates the price of oil—such as Saudi Arabia and Qatar—will feel less of an impact.
However, stockpiled reserves of oil could supply a reprieve for some.
“Big oil exporters in the Gulf have been moving oil at a furious pace out of the Gulf and away from the Strait of Hormuz for the past few weeks,” says Krane, noting that Saudi Arabia has filled up a number of its reserves in the Red Sea, the Netherlands, and South Africa. “There is a lot of Saudi oil right now that’s nowhere in danger of an Iranian attack.”
China has amassed reserves of roughly one billion barrels of oil, around half of its storage capacity, according to Krane. (Other analysts cite 900 million barrels.) China sources its oil from a number of supplies, which could ease the impact of any closure in the Gulf, but 14% of total imports still come from Saudi Arabia, and an additional 7% from the UAE as of 2025.
The particular impact on liquid natural gas supplies
Equally concerning for experts is the impact of LNG supplies, with roughly 20% of global LNG passing through the choke point in the Middle East, nearly all of which is from Qatar.
Qatar’s state-owned energy firm confirmed that it would be stopping production of LNG at its two main facilities on Monday after attacks.
“Due to military attacks on QatarEnergy’s operating facilities in Ras Laffan Industrial City and Mesaieed Industrial City in the State of Qatar, QatarEnergy has ceased production of liquefied natural gas (LNG) and associated products,” the company said.
“Ras Laffan is critical to the economic security of the Qatari state. It’s impossible to overstate its importance to Qatar and its economy and political system,” says Krane.“This will definitely put a lot of upward pressure on gas prices, especially at a time when you have countries that urgently need that gas.”
The Dutch TTF index, which measures the price of LNG, jumped by over four points on Monday following the hit on Qatari infrastructure.
How insurers are reacting and the impact on business amid uncertainty of war
Insurance providers for oil companies and tankers are showing signs of apprehension and dropping war risk protections.
“Insurance companies are rightly worried about this, so they are retracting coverage, or doubling or tripling the cost of it,” says Krane. “A lot of the shipping vessels that are not going through the Strait are either balking at the costs or waiting for headquarters to approve it.”
Raydan also marks the cancellation of contracts and price increases as a major reason for the halt in traffic.
“For a lot of ships, if they want to transit via Hormuz, they’re going to be transiting without coverage, meaning if anything happens—a hit, an oil spill—it’s on them,” she says, noting that companies simply won’t—nor should they—take that risk.
The uncertainty surrounding Iran’s next move is prompting companies to keep tankers docked, too.
“Iran seems to be ready to escalate further, if they want to… it seems that they are willing to go after energy infrastructure,” says Raydan.
And even if mediators were to sit down immediately and negotiate an end to the conflict, the ripple effect on market prices would still be felt, she argues.
“We are going to feel this for at least [a few] weeks. We need to take what happened, especially to the Gulf states, as something that will definitely change the region. The region right now is not the region that it was before the war,” says Raydan.
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