In our blog last week, we covered how escalating tension between the U.S. and Iran have impacted global energy markets. After weeks of uncertainty, the U.S. and Israel have launched military strikes against Iran. This escalation has had a direct impact on energy markets, driving up oil and gas prices globally.
The long-term impact of this war remains uncertain. Impact will largely hinge on a few key factors including length of conflict, whether or not Iran will continue to target oil and gas sites and the status of shipping through the Strait of Hormuz.
How Do Rising Crude Oil Prices Impact the U.S.?
Iran holds roughly 12% of the world’s proven crude oil reserves, approximately 208 billion barrels, making it the third-largest holder globally. Following the initial strikes on Iran, the benchmark Brent crude oil contract rose nearly 8% to more than $83 per barrel, which is the highest the price has been since July 2024. Shipments of oil slowed as well, as the Strait of Hormuz remained closed, only letting through approximately five tankers on March 1st. Typically the strait sees up to 60 tankers pass through on a daily basis.
The Strait of Hormuz is a crucial part of the global oil market, as nearly 20% of global oil and liquified natural gas (LNG) pass through it every day. If the strait continues to remain closed or operate with limited capacity, global oil prices are likely to continue to rise. Although there are some alternative routes, capacity is very limited and many fear that those routes could become targets for attacks by Iran and Iran’s allies.
The U.S. generates most of its electricity from sources other than oil, but Americans will still feel the impact at the gas pump. Crude oil is the primary input for gasoline, meaning disruptions in global supply can translate into higher gas prices. Gasoline has already exceeded $3 per gallon for the first time since November and limited supply and uncertainty threatens to drive those prices up even further.
The Advantage of Domestic Natural Gas Production
While heightened oil prices have driven up the price of energy in Europe and Asia, the U.S. produces most of its natural gas domestically, which has helped cushion the blow of high prices. Although energy pricing can be affected by the cost of oil, the U.S. boasts the world’s largest natural gas production. Because of this, U.S. natural gas prices are less exposed to global shocks than oil markets
Natural gas storage has remained higher than historical benchmarks, which helps mitigate high fluctuation of natural gas prices. This coupled with domestic natural gas production can help protect the U.S. energy market, but with the end date of the war unclear, it is difficult to speculate on the exact impacts of a long-term conflict.
The Big Picture: Potential Long Term Impacts
A lot of uncertainty still remains about how the conflict in the middle east will progress. Much of the future of the energy market hinges on whether or not there will be prolonged disruption in the shipping of oil and LNG through the Strait of Hormuz. Additional impacts could be felt if Iran continues to target production. Many experts are still waiting to see what the prolonged impact will be.
However, not every geopolitical conflict results in sustained energy price increases. Markets price in risk quickly and adjust as conditions evolve. For commercial buyers, the key is understanding exposure pathways and maintaining a procurement strategy that allows them to adjust when prices become volatile.