The United States and Israel launched their attacks on Iran last month. As a result of Iran’s retaliatory actions, the world oil market has a supply shortage greater than the oil crises of 1973 and 1979 combined. The full panic hasn’t been felt in the United States, even as US gasoline prices hit $4 a gallon for the first time since 2022.
On March 12, President Donald Trump wrote in a social media post that, “The United States is the largest producer of oil in the world, so far, when oil prices go up, we make more money.” However, at the 10,000-person CERAWeek conference in Houston, from March 23 to 27, I did not hear anyone promoting high oil prices. Instead, the discussion was more concerned with how the Iran conflict will play out in the markets and shape the future of the global energy system. This article is a combination of what I’ve heard from organized events and private conversations, as well as my thoughts on what it means to be one month into the conflict with Iran.
Iran and the Strait of Hormuz
So far, Iran has shown that it is willing and able to control the Strait of Hormuz, the only access to the Persian Gulf. One-fifth of the world’s supply of oil and refined natural gas (LNG) usually flows through the strait on its way to markets around the world, mainly in Asia. Energy security experts have viewed the blockade of the strait as an alarming but unexpected situation, as mining or otherwise blocking the strait could also prevent Iranian oil from reaching the market. But Iran, retaliating against the bombing campaign of the US and Israel, has many ways to harass and destroy ships on the coast of the Persian Gulf, from small boats on the coast to drones that can be launched from a distance of 1,200 kilometers. Iran has also attacked at least 22 ships in the Persian Gulf since the war began to show its depth.
In this environment, no ship dares to go overboard without Iran’s permission, and insurance is very expensive or impossible to obtain. But since the strait is not physically blocked, Iranian oil is still reaching the markets, in larger quantities than before the war.
The Iranian regime is trying to gain more power by attacking its neighbors’ oil and gas facilities. Key attacks have damaged the Ras Laffan LNG facility in Qatar, the Yanbu facility on the Red Sea in Saudi Arabia – the end of the Saudi pipeline crossing the knife – and Fujairah in the Gulf of Oman in the United Arab Emirates (UAE), where Emirati crude can be exported by truck. These attacks are intended to reduce the crude oil that can reach the market today and prolong the supply shortage beyond the opening of the strait, as damaged equipment will take months or years to repair.
Confusion in the global energy system
Several sessions at CERAWeek tackled the political implications of the conflict. In an interview with Brookings Vice President Suzanne Maloney, US Secretary of Defense James Mattis explained how the United States may have missed the weakness of the Iranian government after the protests of January 2026. The government has killed thousands of people, with a reported total of about 7,000 and estimates of more than 30,000, “showing that “the industry will show its people.” Rather. and weakening the regime, the protests have strengthened their power, as few people are willing to take to the streets. He said that he has trouble finding good options for the United States in this time of conflict.
The perceived risk of oil markets will change after the conflict; the world will not go back to the time before the war. Saudi Arabia, the UAE, Qatar, Kuwait, Bahrain, Iran and Iraq send most of their oil through the Strait of Hormuz, although Saudi Arabia and, to a lesser extent, the UAE and Iran have pipelines that avoid the slope. Overall, the world is short about 11 million barrels per day (mbd), or 11%, of crude oil supplies, compared to about 20 mbd that crossed the strait before the war. In addition, the oil market takes the power of the production of materials to understand the risk of supply, but almost all the power of the world is in Saudi Arabia and the UAE. Finally, it is hard to imagine Saudi Arabia continuing to be a safe oil supplier as long as Iran harasses traffic through the strait. Eliminating this capability militarily would be very difficult indeed.
I found that in private meetings, industry and government leaders were more concerned about the conflict than they were in public. The oil and gas industry is concerned about physical damage to its facilities and economic damage to its entire industry. (Many of the facilities damaged by the attacks are joint ventures with Western companies.) Some industries are worried about their resilience in the supply chain, and those that rely on oil or natural gas for fuel or food products are worried about their ability to get supplies at all. Asia continues to break even now, because that is where most of the Persian Gulf oil and LNG is sold. But higher prices will be seen everywhere as the impact spreads. Many people I have spoken to are surprised that oil prices are not higher than they are, expecting them to rise as the conflict continues and shortages become more apparent.
Energy shortages and high prices are hitting Asia now, and Europe soon
Asia is getting a lot of attention in the world right now, and for good reason. Asian countries are already taking drastic measures to reduce the demand for natural gas they get as LNG and to switch to coal for power generation. Pakistan has closed schools to conserve energy, and India has a shortage of cooking gas.
However, the conflict will also affect Europe. After Russia’s all-out invasion of Ukraine and the disruption of pipeline gas supplies to Europe, the continent began to buy more LNG from the non-existent supply. Europe is now facing its second energy crisis in four years, as nearly 20% of the world’s LNG supply has been shut down. Some of that supply will be idle for years, as two of the 14 trains carrying the liquid at Qatar Energy’s Ras Laffan plant, which represent about 3.5% of the world’s energy, have been damaged by an Iranian missile strike. Rebuilding will take years.
Already, wholesale electricity prices in Europe are the highest as natural gas sets prices to clear the market, and concerns about high energy prices reducing economic competitiveness in Europe are widespread. European officials at the meeting indicated that it is necessary to produce natural gas to balance the production of renewable electricity in many parts of Europe, but the increasing price of LNG on the world market will worsen Europe’s problems.
The world economy will be destroyed if the conflict continues
Many people I spoke to at the conference are worried about inflation and recession. The United States is insulated from the natural gas crisis, as it has significant domestic production, and US LNG facilities are already exporting as much as they can. But despite being the world’s largest producer of oil and natural gas, the US economy will see a rise in fuel prices. Oil is sold on world markets, so US consumers pay world prices. Rising fuel prices flow through the prices of goods and services throughout the economy. The price hike will be even greater for countries that are also dependent on imported LNG.
In addition to oil and gas, the world’s fertilizer supply is taking a big hit. Natural gas is key to the production of nitrogen fertilizers such as ammonia and urea; one estimate found that natural gas accounts for 70% to 90% of the cost of ammonia production. Access to natural gas makes the Gulf region an ideal place for the production of nitrogen fertilizers – conservatively, about 12% of the world’s supply has already been lost due to the blockage of the strait. In addition, the Gulf region is an important production area for sulfur, extracted from “sour” oil and gas. Sulfur is an important nutrient in its own right and is the primary ingredient in phosphate fertilizers. Between the lack of supply produced in the Gulf region and the rising price of natural gas contributing to higher costs elsewhere, fertilizer prices and shortages could be important tools for rising food prices in the coming months.
A prolonged disruption could also cause a recession, as economic activity coincides with higher fuel prices. Estimates of where prices might go and at what price would trigger recessions in various regions and around the world have been the subject of private discussions. Currently, the oil market trades in “financial barrels,” the future sale of oil at future prices. Despite the massive disruption, the oil and LNG that were on board and in storage when the conflict began are still undermining many buyers. Once these temporary corrections are over and market participants deal with real shortages, we are in uncharted territory for oil and LNG prices.
No one really knows what to expect, but the kinds of prices I’ve heard about as causing a recession seemed more than I could handle. Someone at the secret meeting summed up the situation this way: “Can you run away from the dogs you let loose?”
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