Tensions between Iran and Israel have reignited fears of a wider regional conflict, with Iran threatening to close the vital Strait of Hormuz, disrupting 20% of global oil trade. Europe faces heightened energy insecurity due to its reliance on Gulf LNG and oil, while the U.S. stands to gain economically and strategically from increased demand for its energy exports. Any prolonged disruption could trigger global inflation, economic slowdowns, and possible military escalation involving NATO.
The recent escalation in tensions between Iran and Israel has raised anxiety surrounding a broader regional crisis with implications for energy markets globally. After U.S. strikes on Iran’s nuclear infrastructure at Fordow, Natanz, and Esfahan, Iran’s Parliament voted to approve the closure of the Strait of Hormuz, a choke point for 20 percent of total global oil trade, though the final decision is left to the Supreme National Security Council. India, which imports about 80 percent of oil, finds itself at risk of interruptions and time and money lost to increased shipping times (10-15/20) and shipping costs (40-50 percent) according to experts. Yet, Indian Petroleum Minister Hardeep Puri downplayed the threats to international shipping and, off oil prices, touting India's sourcing alternatives and stock levels. Brent crude - oil's global gas price - rose more than 5 percent on June 23 after the U.S. strikes on Iranian bases but erased much of the gains following speculation of potential ceasefire engagement and that OPEC+ has a lot of empty space to play. Analysts say the market will now be very much dependent upon how Iran responds, with the threat alone raising risk premiums and implications for light Brent.
Europe is especially vulnerable since it is still recovering from the energy revolution that occurred after the sanctions and import ban imposed on Russia after war with Ukraine. European gas stockpiles, which are already under pressure from the suspension of Israeli LNG exports through Egypt, could be significantly impacted by a possible disruption of LNG shipments from Qatar and Iran across the Strait. An economic slowdown is a possibility as the continent's inflationary pressures are set to rise due to the spike in Dutch TTF gas prices to Euro 41/MWh.
The strategic fragility of Hormuz is shown by geopolitical history. Known as the "Tanker War," Hormuz was frequently targeted during the 1980s Iran-Iraq conflict. Parallels can be seen in the current battle since Iran's asymmetric capabilities and regional influence, which include missile strikes, drone assaults, and sea mines, pose a real threat to international trade. Companies that operate oil tankers, such as Frontline, are already avoiding Hormuz, which raises insurance costs and discourages transit.
But amid the chaos, the United States seems to be the beneficiary. With WTI crude futures spiking after the strike recon and US oil production near all-time highs, US producers should benefit from higher prices. And with Europe pivoting to LNG imports after the Ukraine war, Europe is heavily reliant on US exports. Any disruption in supply routes from the Middle East creates more demand for US LNG, which strengthens the US's economic and geopolitical leverage in global energy markets.
Although Iran may isolate itself economically by closing Hormuz, which also cuts off its own exports to China and India, Iran can still choose to intermittently harass or use indirect means to increase the price of energy globally, without truly closing the strait. The US Federal Reserve now has a policy dilemma- if energy prices rise abruptly, CPI Inflation could easily hover around 4% making rate cuts questionable.
Simultaneously, Europe's nascent economic recovery is still extremely fragile. The World Bank and IMF have already cut their global growth outlook amid escalating geopolitical tensions, and once again, Europe's energy security is at risk. Despite diversifying away from just suppliers like Norway and the U.S., European countries are still heavily reliant on the Gulf countries for oil and LNG—most of which passes through the Strait of Hormuz. Should Iran blockade that passage, which officials are now seriously considering—as stated by Revolutionary Guard commander and MP Sardar Esmail Kowsari—that would be "a disaster for Europe," in the opinion of a former French intelligence officer. If any Gulf exports were disrupted, Europe would be at serious risk of debilitating energy shortages. Inflation would certainly accelerate as the price of oil and gas would go up—affecting core industries like manufacturing, transportation, and agriculture. Disruptions to shipping could cause delays in critical imports on top of rising prices, and insurance premiums would spike, constricting supply chain options. On the security side, a prolonged blockade would no doubt also wind up with EU navies doing the unexpected, raising a prospect of incident that could draw NATO into the conflict and destabilize the wider region.
As another flashpoint in the Middle East creates renewed disruption, history is repeating itself and jeopardizing energy markets once again to geopolitics. Unless the de-escalation efforts yield a good outcome, we could face oil posting beyond USD 130 a barrel, economic market turmoil resurfacing around the world, and a winter of energy insecurity for the West.
