The war in Iran, now in its seventh day, has brought energy shipments through the Strait of Hormuz to a near standstill, raising significant concerns about global energy supplies. Efforts by the US President to provide naval escorts and additional insurance for tankers have proven unviable due to the immense cost of insurance, estimated at around $350 billion for the hundreds of tankers awaiting passage. The US Development Finance Corporation's maximum contingent liability of $205 billion is insufficient, potentially requiring Congressional allocation of more funds.
The closure of the Strait of Hormuz disproportionately impacts Asian economies like South Korea and Japan, which are heavily dependent on oil and LNG from Saudi Arabia, Qatar, and the UAE. These nations are now seeking alternative supplies from Australia or the USA, and considering energy substitution by switching to coal if gas prices remain high. If the crisis persists, demand destruction, where industries slow or shut down due to physical supply shortages, is a likely outcome.
The global energy system is grappling with depleted strategic reserves; the US Strategic Petroleum Reserve is only just over 50% full after being drawn down following the Russia-Ukraine energy crisis. While the Trump administration is not currently considering using it, oil prices exceeding $100 a barrel could trigger its deployment. Analysts from JPMorgan are struggling to forecast oil prices due to the war, noting that previously assumed "economic red lines" for the US, such as oil above $100 a barrel and 10-year government bond yields above 5%, have already been crossed without a clear exit strategy.
