The Iran war puts global energy markets on the verge of a worst-case scenario

The war is on Iran reached a new extreme this week, as both Israel and Iran launched strikes on oil and gas production and export facilities. These attacks raise the stakes in a war that was already choking energy and commodity markets, and will threaten the long-term health of the global economy. The International Energy Agency on Friday recommended that people work from home, drive slowly, and use gas stoves sparingly in order to mitigate price shocks caused by the crisis.

The situation in the Persian Gulf is so extreme, it’s almost unbelievable, analysts told WIRED.

“This scenario is something you give to first-year oil analysts and they say, ‘Okay, if “It’s a really interesting educational thought experiment,” says Rory Johnston, a Canadian oil market researcher. “It’s kind of like, what would happen if gravity suddenly stopped working for 10 minutes?” The things you give students to say, “Let’s do a thought experiment of something extreme and see how the system would react”? “I never thought we would actually see this.”

Ellen Wald, an energy and geopolitics consultant, agrees. “This is like a simulation of war games in energy markets,” she says.

The initial attacks on Iran earlier this month led to the closure of the Strait of Hormuz, one of the world’s most important shipping routes. The Strait is the central lifeline for oil and gas exports not only from Iran, but from other countries in the Middle East. Most of the Organization of the Petroleum Exporting Countries (OPEC), the world’s largest oil and gas organization, uses the strait to ship oil and gas from the region to customers. The strait is also an important hub for oil and gas by-products such as industrial chemicals and fertilisers. The closure of the strait sent shocks through the global economy: after the initial attacks, oil prices rose above $100 per barrel for the first time since the Russian invasion of Ukraine in 2022.

“Any time there is any kind of military activity in the Persian Gulf or even in the Middle East, oil markets tend to get very tense,” Wald says. The closure of the strait was a sign that this war could have more serious effects than other conflicts. But during the first few weeks, the oil production facilities themselves remained mostly intact. “No oil or products were coming out, and some countries didn’t have enough storage, so they simply shut down production because they couldn’t store the oil,” Wald says. “But this is something that can be reversed fairly quickly.”

But over the past few days, missile strikes have begun to largely target oil and gas infrastructure. On Thursday, Israel launched a series of strikes on various oil and gas facilities in the region, most notably the South Pars gas field, the largest natural gas field in the world, which is jointly controlled by Iran and Qatar. Iran responded with counterstrikes, including on the world’s largest liquefied natural gas export facility in Qatar. Oil prices temporarily rose to nearly $120 per barrel.

These strikes appear to have destroyed infrastructure that is vital to the world’s fossil fuel supply. Qatar produces about 20 percent of the world’s liquefied natural gas supplies. The CEO of Qatar Energy, the state-owned oil and gas company, told Reuters that the strikes had drained 17 percent of its capacity over the next five years, and that the company would be forced to declare force majeure on contracts concluded with countries in Europe and Asia due to the damage.

“Once you get to the point where real, long-term damage is done, it’s not easy to reverse,” Wald says. “Once the conflict ends, we could still see a period of sustained rise in oil prices due to loss of production.”