The Gulf war is not over. The United States launched airstrikes on Iran on July 7 after several Iranian attacks on vessels transiting the Strait of Hormuz, and suspended a US Treasury Department license that had authorized Iranian oil sales for sixty days. Tanker transit through the Strait of Hormuz remains below pre-war levels, and it remains uncertain if this is a temporary flareup, or instead if these events could derail US-Iran peace talks. A resurgence of tensions could halt the notable increase in oil exports from the Mideast Gulf in recent weeks, and oil prices rose on July 7 after the US strikes.
While the immediate path ahead is uncertain, the past four months were full of surprises for energy analysts. It is a good time to take stock of the lessons learned—and the structural changes that could follow.
1. An energy crisis in Asia hardly registered elsewhere.
The Strait of Hormuz closure hit Asia first and hardest, cutting off critical supplies of crude oil, jet fuel, liquefied petroleum gas (LPG), and liquefied natural gas. Countries such as India and Nepal were forced to ration LPG, while Sri Lanka and the Philippines imposed work from home policies to cut oil consumption. In contrast, Western countries were relatively unscathed. Gasoline prices rose in the United States but remained below 2022 levels and far below the peak of 2008, while European natural gas prices never approached the dizzying heights seen after Russia’s war on Ukraine. Asian importers will likely conclude that they face far greater risks than other regions, and indeed that fossil fuel energy abundance in Western countries may embolden actions that undermine their energy security.
Based on this lesson, here’s what to expect next: Asian oil and gas importers, perhaps led by Japan, will bolster cooperation and resource sharing.
2. Inventories were the key shock absorber.
When oil production dropped and spare capacity was unavailable, inventories delivered. The International Energy Agency coordinated the largest emergency stockpile release in history, the United States delivered record amounts of crude from its Strategic Petroleum Reserve, and refiners drew down commercial inventories.
What to expect: Countries will seek to rebuild robust inventories to protect energy security. The Arab Gulf states may expand storage abroad, close to their customers in Asia, building on their past experience in Japan with jointly managed inventories. And large importers such as India will have to get serious about building stockpiles.
3. The global refining system is resilient.
Some 1.2 billion barrels of oil supply from the Mideast Gulf have already been lost, especially medium sour and heavy sour crudes. Many Asian refiners are configured to run these crudes and value their high yield of middle distillates such as diesel and jet fuel. Soaring Asian jet fuel prices in April and May prompted fears of steep price hikes and perhaps jet fuel shortages in Europe. Yet despite the crude quality challenges, Asian refiners were able to find alternative supplies via stockpile releases and exports from the United States and elsewhere. It was fortunate that these events occurred in the spring shoulder season before peak gasoline consumption in the United States, and refinery run cuts rather than substitutions did the heavy lifting. But refiners proved remarkably flexible.
What to expect: Countries dependent on medium sour and heavy crudes may seek to reduce their dependence on Middle Eastern crude grades. But costly refinery reconfigurations will remain a difficult proposition.
4. The supply shock affirmed China’s status as the world’s swing consumer.
The country’s crude oil imports dropped to 7.8 million barrels per day in May, the lowest level in more than eight years. China had stockpiled an estimated 1.1 to 1.3 billion barrels of crude oil, and commercial inventory draws may have played a minor role. But China also curtailed refined product exports and cut refinery runs, while prioritizing transportation fuels rather than chemicals output.
There are a few critical takeaway messages. Abundant stockpiles now enable China to dial down crude imports and cut product exports when oil prices are high, and to stockpile crude when prices are low—so the world’s largest importer is effectively keeping a collar on oil prices. China’s underlying demand may be lower than it appears, due to years of inventory builds. And the fast-evolving nature of China’s energy consumption, with the rise of electric vehicles and high-speed rail, suggests it can endure an oil supply disruption with limited impact on economic activity.
What to expect: The market will be keenly focused on Chinese crude oil import volumes for June and July, and deciphering Chinese stockbuilds and inventory draws will remain one of the key challenges for traders and analysts.
5. Western Hemisphere producers are now essential to energy security.
The Organization of Petroleum Exporting Countries (OPEC) regards itself as the guarantor of oil market stability, protecting the market from volatile boom and bust cycles and maintaining spare capacity. But with the Strait of Hormuz closed, spare capacity concentrated in Saudi Arabia and the United Arab Emirates was inaccessible, and OPEC production allocations looked meaningless. A ramp up in oil exports from the United States helped fill the immediate gap. No region can replace the Mideast Gulf’s massive production volumes, reserves, and low production costs, but non-OPEC supply helped the market absorb four months of disruption.
What to expect: Over the longer term, countries looking to reduce their exposure to Middle East choke points may give a boost to new exploration and production in Latin America, sub-Saharan Africa, and North Africa.
The takeaway
This supply shock produced short-term adjustments and longer-term structural change, and it may take some time to distinguish one from the other. But it has already revealed some surprising sources of resilience.
Ben Cahill is a nonresident senior fellow at the Atlantic Council’s Global Energy Center.
about the author
stay connected
Sign up for PowerPlay, the Atlantic Council’s bimonthly newsletter keeping you up to date on all facets of the energy transition.
related work
our work
The Global Energy Center develops and promotes pragmatic and nonpartisan policy solutions designed to advance global energy security, drive economic opportunity, and foster a sustainable energy future.
Image: Christine Harb, Unsplash,
