As well as claiming more than 550 lives, the war between the United States and Israel and Iran threatens to inflict severe economic damage across the world, by pushing up the oil, gas and energy prices.
About a fifth of the world’s oil and liquefied natural gas (LNG) passes on ships through the Strait of Hormuz, a narrow stretch of water separating Iran from the Gulf countries.
With Iranian missiles hitting oil and gas sites in the Gulf – including the world’s largest LNG export facility Ras Laffan – and fears that ships may be targeted, Qatar has halted its LNG production and traffic through the Strait has slowed drastically.
The disruption has sent oil and LNG prices surging, raising costs for households and businesses worldwide that rely on fossil fuels for electricity, transport, heating and manufacturing.
In two online briefings – focused on Europe and Asia, respectively – energy analysts warned journalists that prolonged disruption could trigger a global economic crisis. Governments should seek to reduce their reliance on oil and gas – through investments in clean energy and energy efficiency – rather than just seeking non-Gulf oil and gas suppliers, they said.
Seb Kennedy, founding editor of EnergyFlux.News, said the war is “a bonanza for US LNG exporters and a catastrophe for everyone else.” He added that “if this goes on for months and months then [the energy crisis] could be on the scale we saw in 2022”.
Asia hit hardest
Asian economies are expected to bear the brunt as the largest buyers of Qatari LNG. Research by ZeroCarbon Analytics suggests that Japan and South Korea, which get over three-fifths of their energy from oil and gas imports, are among the most vulnerable.
Sam Reynolds, a researcher from the Institute for Energy Economics and Financial Analysis said that Japan’s definition of energy security prioritises diversifying fossil fuel supply over promoting domestic renewables and, while Reynolds said this crisis could change that, he doubts that it will. Both Japan and South Korea are likely to speed up their pursuit of nuclear energy though, he added.
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Several South-East Asian nations – like Vietnam, the Philippines and Thailand – have invested in infrastructure to import LNG over the last few years in an attempt to gain energy security by diversifying supply routes beyond natural gas pipelines.
But ZeroCarbon Analytics researcher Amy Kong said that these countries were “seeing the same problems with new dealers” as “all the cards are held by a few LNG suppliers”. As these countries have huge untapped renewable potential, she said that “clean energy – not LNG – would be the key to avoiding impacts from these crises”.
Khondaker Golam, research director at Bangladesh’s Centre for Policy Dialogue, said Bangladesh’s already strained energy system will come under further pressure. In the short term, the government is likely to ration supply and seek LNG cargoes from outside the Gulf. Over time, however, the crisis could accelerate implementation of the country’s rooftop solar programme and other renewable projects.
China and India are also reliant on Gulf oil and gas and are now exploring alternative suppliers like Russia and, at least in India’s case, Canada and Norway. Over the longer term, Oxford University energy and climate professor Jan Rosenow said that China is also likely to double down on moving away from oil and gas by promoting electric vehicles, batteries and electrifying industries.
Although Europe imports a smaller share of its energy from the Gulf than Asia, it will not be insulated from price shocks. As Asian buyers compete for LNG cargoes – particularly from the US – gas prices will rise across the world, Kennedy added, with Europe already seeing increases.
Europe suffers too
Rosenow said that he was experiencing “deja vu” from when Russia restricted gas supplies to Europe, sparking a global energy crisis. Following that, he said, Europe had “not really managed to scale up the alternatives fast enough”, adding that “now we pay the price for that”.
He cited the example of Germany, where the government last week weakened requirements for buildings to install electric heat pumps instead of gas boilers. “We [in Europe] just haven’t made enough progress in terms of rolling out heat pumps, decarbonising industry and scaling up electric mobility,” he said.
Some in non-Gulf oil and gas producing countries have argued that this disruption justifies more production. Kennedy said the industry would “do everything it can to make that case”, but warned that new projects must consider demand decades ahead. By then, he said, “this conflict has probably long been forgotten about and we’re on to the next one”.
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In the United Kingdom, the government is under pressure from the right-wing opposition and US President Donald Trump to reverse its ban on licenses for new oil and gas fields in the North Sea.
But business secretary Peter Kyle said the crisis showed the UK must “double down” on renewables to protect its “sovereignty” as the crisis has exposed the country’s reliance on fossil fuels “from parts of the world which are fundamentally unstable”.
“We keep on seeing these lived examples of how instability, through regional instability, is creeping into our energy prices for which the British government has no agency”, he said.
Interest rates stymie renewables
But in the short term and without government policy intervention, Morningstar equity analyst Tancrède Fulop told Climate Home News that the crisis is likely to hold back the development of renewables.
This is because rising inflation from higher energy costs is likely to prompt governments to raise the cost of borrowing, he said. As renewables projects typically require large upfront capital investment, higher borrowing costs can undermine profitability.
Gas-fired power plants, by contrast, typically require lower initial investment than solar, wind or hydro, but higher operating costs over time, as fuel must be continuously purchased.
“What we saw between 2022 and 2024 with high inflation, high gas and power prices – a bit similar to today – renewable companies materially underperformed because of those high interest rates,” he said, “so all in all it won’t be as simple as oil and gas prices are surging so it’s good for renewables”.
