This is the Persian Gulf, where roughly 20% of the world’s oil and 20% of the world’s natural gas comes from. Iraq, Kuwait, Bahrain, Qatar, Saudi and the UAE, almost all of their oil and gas has to pass through THIS narrow strait. The strait of Hormuz, which is currently almost completely closed due to the threat of Iranian missile and drone strikes. <end map 1>
This is already causing major energy price spikes in the US, Europe and ESPECIALLY Asia. But, experts are telling us that it’s likely to get much much worse, if the conflict continues for much longer, which it probably will.
So, what can you expect? How bad will the energy crisis get?
Hey, I’m Joeri, I have a PhD in economics, and in this briefing, I will summarize AND visualize for you the latest research by geopolitical experts, and energy economists on the upcoming energy crisis.
Specifically, I’ve constructed three scenarios for you and will tell you how likely I think they are. Scenario number 1 the strait is opened soon, but damage to crucial energy infrastructure means it will take time to go back to normal. Scenario number 2 the conflict will continue for a while because Trump may want to back out, but the Iranians and Israeli’s won’t let him, and scenario number 3, a wild card BUT apparently seriously considered by the Trump government, the conflict continues AND Trump moves to BAN US energy exports to keep voters happy for the upcoming mid-term elections. This scenario would be a disaster for Europe and Latin America.
But, before digging into these 3 scenarios with price predictions. AND how likely each scenario is, we have to start our briefing with three
Crucial pieces of context
The first is that this energy crisis is essentially about three different products, which have quite different dynamics.
First, there’s oil. But, the gulf countries essentially exports two types of oil, CRUDE oil, which still has to be refined locally and so-called oil products, like Gasoline, Diesel, cooking oil, and Jet Fuel, which have already been refined in the Gulf. Finally, there’s liquefied natural gas, LNG, which is mostly used to generate electricity and for heating buildings.
LNG mostly comes from Qatar and 90% of it goes to Asia and 10% to Europe. These numbers really only matter in the short term because ships take e.g. more than a week to travel from the Gulf to Japan. However, after that, ships can can go wherever they please. So, in the long-term EVERYONE that uses LNG will suffer from this blockade.
After all, if there is no LNG in Asia, Asian buyers will start bidding up the price to attract ships from, for example Europe, which will raise the price of LNG all around the world, ALSO in places that export LNG, like the US.
However, for CRUDE oil, the dynamic is quite different. Again, about 90% of crude oil was sold to Asia. But, in this case, if the strait is closed longer, there may be some relief because there are two pipelines that COULD mean that after a while about 10-15% of crude oil could bypass the strait of Hormuz.
And, for Europeans like me, there may be some more good news: NOT all oil is the same. There’s sweet and there is sour crude oil. There is light and heavy crude oil.
This is important because our European refineries are optimized for sweet, light oil from Africa and the US. On the other hand, Asian refineries are optimized for Middle Eastern medium sour oil. And, CRUCIALLY BECAUSE THIS BECOME IMPORTANT LATER, US refineries are NOT optimized for light US shale oil, but rather for heavy & sour crude oil from Alaska, Mexico and Canada.
This is why European and American oil prices, measured by the Brent crude and Western Texas indices respectively, did go up, but not by as much as crude oil prices in Asia. WTI crude oil. President Trump has used this benchmark to try to convince the American public things haven’t gotten so bad yet. But, this is misleading. What matters for MOST Americans is of course not crude oil but rather the price of refined oil products such as gasoline, diesel and jet-fuel.
A lot of crude oil was refined in the Gulf. But now, ships carrying jet-fuel, Diesel and gasoline are also stuck in the gulf.
Therefore, as you can see here, even in the US, consumers are already suffering more than the WTI benchmark would have you believe. While the WTI went up by 60% since the start of the year Diesel in the US is up by 100% and gasoline and jet fuel by 80%.
And this makes sense, right. Given that we’ve seen that for crude oil the global market is NOT completely global due to refineries in the US, Europe and Asia being optimized for different oil. But, jet-fuel, Diesel, gasoline, this can be shipped all over the world. So, ordinary Americans are less protected than some think.
But, sadly, today’s already sky high prices, might get quite a bit worse if the conflict drags on because of our second piece of crucial context.
The role of strategic reserves. Rich countries like Japan, China, the US and European countries all have strategic reserves. China has the most, at about 1.3 Billion barrels. Then EU countries have about 570million barrels. Japan has about 470 million barrels. Meanwhile the US has about 415 million barrels. Together that is about 75% of global reserves. But, because, for example China imports more than the US, the picture for how many days these reserves will last is different. Japan has about 224 days. China 110, the US 120 and the EU about 90.
So far, countries together have released about 400 million barrels, this has kept prices lower than they would have been. But, IF the conflict lasts much much longer, these reserves will run out and then oil prices can go quite a bit higher.
Luckily, there is some good news, in the form of crucial context number 3. <slide 8> People can change. That is when the 2022 gas crisis hit Europe, Europeans collectively reduced the price by quite a lot simply by lowering the temperature in their homes and wearing sweaters more.
Similarly, countries without significant reserves like Bangladesh and the Philippines are already contributing to lower demand for oil by for example reducing the work week from 5 to 4 days. If prices really spike due to a longer war, a lot of Asian countries will turn from gas back to coal for energy generation. Europeans will probably start buying more EV’s from China again, and so forth.
Meanwhile on the supply side, there is good news for gas and bad news for oil.
The good news for gas is that about as much US gas export capacity is about to come online in the next 3 years as the entire production of Qatar, this means gas prices will probably not be as bad in Europe as they were in 2022.
On the other hand, when it comes to oil. Most excess capacity … was in the gulf countries. So, if in the past oil prices went up by a lot, the Gulf countries would bring it back down by pumping more oil. Now they won’t be able to do that.
These 3 are I think the main dynamics that you need to be aware off if you want to know what to expect from the upcoming energy crisis. Asian countries will hurt the most because their refineries need middle East crude. But, when it comes to natural gas and Diesel, gasoline, and jet-fuel, we are actually all in the same boat. Reserve releases will help, keep an eye out for them. But, also keep an eye on total reserves, because if they run out, oil prices could really spike. Luckily though, over time, economies will adapt somewhat as they learn to use less oil and gas.
But, okay, what can we expect concretely? Here are my
Three scenarios
In scenario 1, the US, Israel and Iran reach a quick deal which fully opens the Strait of Hormuz. This could either happen because overwhelming US military force cripples the Iranian regime or because a country like China is able to negotiate a truce. In this scenario, oil and gas prices will slowly come down from the level they are now. But, prices will remain higher than they were before the war due to a lingering threat of Iran closing the strait again. Most professional economic reports I’ve read, like those from Goldman Sachs, the International Energy Agency and Deutsche Bank use this as their baseline. But, honestly, and I will explain later exactly why, I think this scenario is very unlikely and give it a 10% probability.
In scenario 2, the war continues for 6 months or longer. The strait of Hormuz remains largely closed. This means the world will run out of reserves sooner or later. But, at the same time, the world will adapt somewhat, meaning that gas and oil prices will stabilize at around 200 to 300 percent of where they were. Europe will face the highest gas prices whereas Asia will face the highest oil prices. The US gets of relatively easy but still faces around double the energy prices than it had before the war. Just for reference, this means Brent crude oil prices will go to around 150 to perhaps even 200 Dollar per barrel. I give this scenario an 80% probability.
Finally, there’s the energy nationalism scenario where Trump becomes extremely unpopular due to high energy prices and to somewhat save the mid-term elections, he bans many US energy exports. Since, we have seen that especially Europe heavily relies on US gas AND oil, this would be a massive disaster for Europe, and while it would probably be very effective at lowering US natural gas prices, it would NOT fully lower gasoline, Diesel and jet-fuel prices because US refineries are optimized for heavy crude oil, which they do not produce enough of themselves. Finally, not being able to export would of course cost US producers a lot of money and therefore the US government a lot of tax income, which it will need to fight the war. So, I will only give this scenario a 10% probability.
But, why these probabilities for these scenarios?
The reports that I used for the oil price estimates, Goldman Sachs, Deutsche Bank, the international energy agency. They all used the short conflict as their baseline. So, why do I think a long war is now way more likely? Well, there are two reasons.
The first is reason is that the reality of modern warfare AND the geography of the strait of Hormuz favour Iran. You see, there are mountains here everywhere. So, it will super easy for small Iranian strike teams with cheap drones or rockets to continue to harass ships, even if there are US troops in Iran that try to occupy this mountain range or try to take out the regime. Even in that case, small Iranian teams can lay mines or launch cheap naval drones from almost anywhere.
This brings us to reason number 2 why a short war now seems increasingly unlikely. So far whenever Trump did something wild AND it spooked financial markets, like threatening to anex Greenland, he always ‘made a deal.’ Financial market traders actually called this the TACO trade, standing for Trump Always Chicken Out.
One potential reason why oil prices are NOT higher right now, is exactly this. Oil traders expect Trump to back out when oil prices get too high. However, according to many of the geopolitical experts I follow, the REAL problem right now is that Trump is no longer in control for two reasons.
First, he started this war with Israel. Even if Trump can convince the Iranians he will truly retreat, HE also needs to convince them the Israeli’s will retreat, and so far, he has not been able to fully control the Israeli’s.
However, the second reason is now perhaps even more important, many experts agree that neither the US or Israel are now fully in control of the war, is that they essentially hurt the Iranians too much. Therefore, they don’t have much more to loose. And, importantly, given that Trump struck them in the middle of negotiations, how can the Iranians trust that he won’t just hit them again in a few months.
This is why they demanded that the US retreat from all major bases in the region. Which… do you think Trump will just leave the Middle East like that? Who knows. But, I don’t think so.
This is why, sadly, I think scenario 2 is currently the most likely, meaning that European natural gas prices are likely to go up a by almost double, which luckily is far less high than in 2022.
Given that reserves are limited, oil will likely get far more expensive. 150 - 200 USD per barrel are some of the estimates that I’ve seen. This would be unprecedented. Although, corrected for inflation, it would be slightly below what happened in 2008, just before the global financial crisis.
This will be a massive hit to all economies across the globe, especially in Europe and Asia, who are the biggest oil importers. It will lead to inflation. It may cause another food crisis because natural gas is a big input in fertilizers. It may cause massive currency crisis in South Asia because they rely a lot on remittances from the Gulf countries. It would mean airline tickets get much more expensive, and of course, it would be like a great depression in the Gulf countries.
But, that is not what this video was about. This was purely about the effects on oil and gas. If you’d like to see a follow-up analysis about these other subjects. Let me know in the comments below