Iran War Puts Global Energy Markets on the Brink of a Worst-Case Scenario

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

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

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

Ellen Wald, an energy and geopolitics consultant, agrees. “This is like one of those war game simulations in energy markets,” she says.

The initial attacks on Iran earlier this month effectively closed off the Strait of Hormuz, one of the world’s most important shipping routes. The strait is the central lifeline for oil and gas exports from not only Iran, but other countries in the Middle East. The bulk of the Organization of the Petroleum Exporting Countries (OPEC), the world’s largest oil and gas cartel, use the strait to ship oil and gas out of the region to customers. The strait is also a critical hub for oil and gas byproducts like industrial chemicals and fertilizer. Closure of the strait sent shocks through the global economy: After the initial attacks, oil prices shot up above $100 per barrel for the first time since Russia’s 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 jittery,” says Wald; closing the strait was a sign that this war could have much more extreme impacts than other conflicts. But for the first few weeks, the oil production facilities themselves remained mostly untouched. “No oil and no products were getting out, and some countries don’t have enough storage, and so they were shutting down production simply because they couldn’t store the oil,” says Wald. “But that’s the kind of thing that can be fairly quickly reversible.”

Over the past few days, however, missile strikes have started heavily targeting 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 world’s biggest natural gas field, which is jointly controlled by Iran and Qatar. Iran retaliated with counterstrikes, including on the world’s largest oil export facility in Qatar. Oil prices temporarily shot up to nearly $120 a barrel.

These strikes appear to have damaged infrastructure that’s crucial to the world’s fossil fuel supply. Qatar produces around 20 percent of the world’s liquefied natural gas (LNG) supply. The CEO of QatarEnergy, the state-owned oil and gas company, told Reuters that strikes had taken out 17 percent of its capacity for the next five years, and that the company will have to declare force majeure on contracts with countries in Europe and Asia due to the damage.

“Once you get into the point where real long-term damage is happening, it’s not going to be so easily reversible,” says Wald. “Once the conflict ends, we could still see a period of sustained higher oil prices simply because of the loss of production.”