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 Persian 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, ‘OK, 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.

“Anytime 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.”

If the war drags on and energy facilities keep being targeted, it’s hard to overstate how devastating its ripple effects could be to the global economy. The head of the International Energy Agency told the Financial Times on Friday that the war represented the greatest threat to global energy supply “in history,” and said that financial markets were underestimating the impact of the conflict.

Johnston points out that the amount of oil and gas that could be taken off the table is roughly the same amount of demand that was shed during the initial global shutdown in 2020 from the pandemic.

“If the strait does not reopen, people are like, ‘Is this recessionary?’ I'm like, ‘No, it's depressionary.’ This will be so, so, so, so, so bad,” he says. “We're talking about Covid-level demand loss, no cars on the road, no planes in the sky, but with no pandemic.”

Wald stresses that the US is not in danger of losing oil and gas supply. However, Americans will soon feel the effects of the war, most directly at the pump.

“The majority of the price of a gallon of gasoline is determined by the price of a barrel of crude oil,” she says. High gas prices will also increase the price of trucking goods around the country: “This is the kind of thing that gets translated into higher prices at the grocery store,” says Wald.

The war doesn’t just affect energy: Crucial global commodity supplies have been choked off by the conflict, from petrochemical production to materials used in semiconductor manufacturing. The prices of different kinds of fertilizer, which are in high demand due to the start of spring planting season in the US, have soared due to crucial supplies being unable to make it out of the gulf. Some airlines have begun raising fares and cutting flights because of high fuel costs.

A lot of the uncertainty that markets are facing right now, both Wald and Johnston say, comes from inconsistent messaging from the White House. It’s unclear just how long the Trump administration expects this war to go on, if there’s any sort of exit plan, or indeed what exactly the aims of the war are. The administration has already put in place some emergency measures aimed at alleviating the price of the war for US consumers, from temporarily waiving the Jones Act to considering removing sanctions on Iranian crude. (Following a meeting with oil producers Thursday, the administration did reiterate that it would not be implementing a US export ban.)

But Trump also said Thursday that if Iran retaliates further against Qatar, the US would take further action.

“NO MORE ATTACKS WILL BE MADE BY ISRAEL pertaining to this extremely important and valuable South Pars Field unless Iran unwisely decides to attack a very innocent, in this case, Qatar,” the president wrote in a post on Truth Social. “In which instance the United States of America, with or without the help or consent of Israel, will massively blow up the entirety of the South Pars Gas Field at an amount of strength and power that Iran has never seen or witnessed before.”

“I never thought we would be this deep into this,” Johnston says. “I don't think Trump ever thought we would be this deep into this.”