HELL AND MINE WATERS: THE NIGHTMARE IRAN ENERGY SCENARIO IS BECOMING REALITY / THE ECONOMIST

Hell and mined waters

The nightmare Iran energy scenario is becoming reality

A longer war means a harsher global economic fallout

This satellite image provided by Vantor shows an overview of damage after a drone attack to Ras Tanura oil refinery, in Saudi Arabia. / Photograph: Satellite image ©2026 Vantor via AP

ENERGY ANALYSTS modelling a war involving Iran have long feared two developments: the Islamic Republic lashing out at its oil-rich neighbours and a blockade of the Strait of Hormuz, through which a third of global seaborne crude and a fifth of liquefied natural gas (LNG) transit daily. 

Until February 28th both eventualities seemed remote, because Iran had too much to lose. 

It would risk pushing Gulf states towards America, its sworn enemy; angering China, the main buyer of its oil; and inviting strikes on its own petroleum infrastructure.

After America and Israel struck at the heart of the mullahs’ regime on February 28th, killing its supreme leader, what remains of the regime is desperate. 

And both aspects of the nightmare scenario are unfolding at once.

Iranian missiles have hit Saudi Arabia’s largest refinery, a gas-liquefaction complex in Qatar, another refinery in Kuwait and the Fujairah oil industry zone in the United Arab Emirates (UAE), a major transit and bunkering hub. 

The first two are offline, as are gas fields in Israel and Kurdistan. 

On March 3rd the American embassy in Saudi Arabia warned of an imminent Iranian attack on Dhahran, the kingdom’s giant oil complex.

At the same time, traffic through the Strait of Hormuz has largely stopped after drone strikes on several vessels and insurers suspended coverage for many others (see chart 1). 

On March 2nd the Islamic Revolutionary Guard Corps, the regime’s praetorian guard, declared the strait closed, warning that any ship attempting passage would be set ablaze. 

Energy prices are already catching fire. 

Brent crude, the global benchmark, has jumped by 14% since February 27th, to $83 a barrel. 

In Europe a megawatt-hour (MWh) of natural gas costs €54 ($63), over 70% more than it did last week (see chart 2). 

Prices in Asia have shot up, too.

On March 3rd Donald Trump sought to cool things down, saying that America would provide insurance and guarantees for shipping lines, and that, if necessary, the navy would escort oil tankers in the Gulf, though the details of the plan remain unclear. 

The announcement comes as traders have become much more pessimistic about the disruptions to energy supply.

The American-Israeli campaign began on a weekend, when markets were closed. 

When they reopened in the Asian morning on March 2nd, the initial reaction was contained. 

Brent finished the day at $78, just $5 above its pre-war close. 

European gas spiked but closed at €44 per MWh, well below the peak of over €310 in 2022, shortly after Vladimir Putin invaded Ukraine. 

Most traders expected disruptions to last days, not weeks.

They are now rapidly revising that view. 

Start with oil. 

The main problem is impeded traffic through the Gulf. 

Freight prices are hitting records (see chart 3). 

Only four oil tankers crossed the Strait of Hormuz on March 2nd, compared with a daily average of 52 in February, according to Vortexa, a ship-tracker. 

Some 14m barrels per day (b/d) of crude and 4m b/d of refined products usually pass through it. 

Around a quarter of the crude could be rerouted via Saudi and UAE pipelines that bypass the strait—leaving the rest with no emergency exit. 

JPMorgan Chase, a bank, estimates that Iraq and Kuwait have about three and 14 days, respectively, as of March 3rd, before hitting storage limits and shutting in the crude supply they usually export via Hormuz—amounting to nearly 5m b/d, or 5% of global production. 

Iraq has already cut output by 1.5m b/d.

Gulf exporters have yet to declare force majeure on scheduled shipments. 

But traders expect some will, and soon. 

A measure of the premium Brent commands over oil traded in Dubai, which reflects the cost of hedging Atlantic crude sales into Asia, has rocketed (see chart 4). 

This signals that Asian buyers are turning to west Africa, Brazil, Guyana, Norway and America to plug Gulf shortfalls. 

Some are already scrambling for cargoes: on March 2nd Brazilian barrels for May delivery into China were offered at a $10 premium to Brent, up from $3.40 on February 27th.

Asian buyers will be the first to feel the pain. 

Although China, Japan and South Korea have stockpiled enough oil to last a few months, they rely heavily on Middle Eastern imports. 

Gulf crude accounts for a third of China’s total demand. 

Trading in the most popular Chinese crude futures was halted on March 2nd after they tripped the 9% daily-increase limit.

Asia’s scramble for alternatives will push up prices for everyone else. 

The market is coming around to the idea that it faces more than a week or two of disruption, which may buoy Brent towards $100 a barrel, observes Warren Patterson of ING, a bank. 

Months of disruption could push prices past $120, last reached in 2022. 

New supply from elsewhere could be unlocked, but even pulling every lever would yield only 1m-2m b/d—and take at least six months to materialise. 

Europe, which buys little Gulf crude, is not insulated: a fifth of its diesel transits Hormuz. 

Diesel “crack” spreads—the margins refiners earn when turning crude into finished fuel—have exploded in recent days.

A halt to gas supplies from the Gulf may hit even harder and sooner. 

More than 80m tonnes per year of LNG, primarily from Qatar, sailed through Hormuz in 2025. 

The Ras Laffan complex, shut on March 2nd, accounted for 75m tonnes per year, equivalent to 17% of global exports. 

Nearly 30 vessels due to load there in March are now circling the Arabian Sea and Indian Ocean; another eight, already laden, are idling on the wrong side of the strait. 

None has crossed since March 1st. QatarEnergy, which operates Ras Laffan, has issued force majeure notices to some long-term buyers. 

Few details have emerged on the extent of damage at the plant, raising the possibility of a lasting shutdown.

As with crude, gas is worrying Asian buyers. 

Last year Qatar supplied 30% of China’s LNG imports, 45% of India’s, and 99% of Pakistan’s; Japan and South Korea buy vast amounts, too. 

The measure of the profit earned from loading gas on America’s Gulf coast and sending it to Asia rather than Europe or elsewhere next month has surged to its highest since December 2022, according to Spark Commodities, a data firm.

On March 2nd an Asian cargo settled at a 60% premium to the previous day’s price. 

LNG freight costs from the Atlantic have never risen so fast in a single day. 

Asian gas prices have now spiked so far above European ones that it would theoretically make sense to load tankers with LNG stored in Europe and ship it east, says Natasha Fielding of Argus Media.

European prices will soon have to catch up with Asia’s, because both are starting to compete for the same spot cargoes. 

Its gas storage, already below seasonal norms and 10% lower than a year ago, is running low with winter not yet over. 

Every week Hormuz stays closed, global supply shrinks by 1.5m tonnes, reckons Wood Mackenzie, a consultancy. 

As Asia and Europe drain storage faster and restock more aggressively over the summer, markets could remain tight long after the strait reopens. 

Anne-Sophie Corbeau of Columbia University expects panic to set in if Qatari exports do not resume by the weekend. 

Prices could soar beyond €100 per MWh.

The economic consequences of the energy shock will be far-reaching. 

A rough rule of thumb used by the IMF is that every 10% increase in the price of a barrel of oil reduces annual global GDP growth by around 0.15 percentage points and raises inflation by 0.4 percentage points the following year. 

In other words, if prices head up to $100 a barrel this would subtract some 0.4 points from GDP growth and raise inflation by 1.2 points—a significant stagflationary shock.

Big energy importers will, naturally, suffer most—and poor ones especially. 

Energy costs tend to make up a greater proportion of spending in less well-off places. 

India spends about 3% of GDP on foreign oil a year (and has barely 20-25 days of usable stocks); Thailand splurges nearly 5%. 

In both cases, though, costlier imports will be reflected not in higher consumer prices but in wider fiscal deficits, as governments force state-owned oil refineries to operate at a loss or hand out subsidies to consumers. 

Asia’s low inflation gives central banks more room to ignore a period of dearer energy—so long as it is brief and currencies, which could plunge as investors rush for safe havens, do not force their hand.

Europe is not so lucky. 

The European Central Bank reckons that a 10% increase in oil prices adds 0.4 percentage points to inflation directly, and almost immediately, plus another 0.2 points indirectly, over three years, as businesses pass higher costs on to consumers. 

The bank also estimates that around a tenth of the increase in natural-gas prices passes through to inflation in one year. 

Traders have pared back bets on the central bank cutting interest rates. 

Higher energy costs will feed through to power prices and sap industrial margins. 

If both oil and gas become dearer, substitution will become harder—potentially reviving coal demand and forcing consumers to cut back.

Despite causing the price shock, America will face less economic damage. 

Its domestic gas market has only a loose connection to global prices, owing to limited export capacity. 

Prices of gas piped to Henry Hub, the American benchmark, have jumped by only 10% so far. 

Petrol prices will rise, angering motorists: a study by the Dallas Branch of the Federal Reserve suggests that a 10% increase in the price of crude raises those at the pump by 5%. 

If they get uncomfortably high, America can always tap 415m barrels in its Strategic Petroleum Reserves.

Either way, the aggregate economic impact is likely to be muted. 

Energy makes up only a small part of the consumption basket. 

And since America produces lots of oil and gas, a price shock pushes up output rather than cutting it, as it does in countries which are net importers.

Mr Trump and his Republican Party may nevertheless suffer political consequences in the midterm elections. 

Voters are already furious over the rising cost of living. 

Higher energy prices may boost economic aggregates, but they also redistribute income from America’s large number of energy consumers to its much smaller number of energy producers. 

They may also make it harder for the Fed to cut rates. 

Traders have cut back on bets that the central bank will cut rates at least twice this year.

All this might explain Mr Trump’s desire to soothe energy markets with naval escorts and insurance plans. 

“No matter what”, he said on social media, America “will ensure the FREE FLOW of ENERGY to the WORLD”. 

He is up against an adversary that is setting out to make America feel its pain.