Iran War Upends the Global Oil Industry: Kiplinger Special Report
Even after the fighting ends, oil producers and importers will be racing to lessen their reliance on oil shipments through the Persian Gulf.
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The Persian Gulf will eventually reopen to shipping and allow the region’s vast energy exports to resume flowing. But the world energy market will never be the same after months of severe disruptions from the war and blockade.
Oil and gas
Security of oil and gas supplies will assume much greater importance for both producers and consumers. By some measures, the loss of exports from the Persian Gulf has been the largest disruption to energy supplies in history. The economies that rely most on Middle Eastern energy, especially those in Asia, will be looking to diversify their supply options. Meanwhile, the oil and gas exporters that line the Persian Gulf will be working on alternate ways to get shipments out. No one is going to want to risk another closure of the narrow Strait of Hormuz, the passageway for a fifth of the world’s oil and vast supplies of gas before the war.
The war has shown a need for greater reserves of oil and refined fuels in parts of the world that depend heavily on imports. At the beginning of the conflict, China had a massive 1.4 billion barrels of strategic reserves, but many other Asian countries lacked much of a buffer when Middle Eastern barrels stopped arriving. Going forward, expect a race to refill existing storage with crude oil, jet fuel and other products, and then to add additional storage tanks, to guard against future supply disruptions.
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The oil-rich U.S. will need to be part of this trend of boosting stockpiles. The Strategic Petroleum Reserve has played a key role in making up for lost output, but it was already heavily depleted in 2022, when Russia invaded Ukraine. Now, it has only about half its long-term storage level, and needs to be refilled eventually.
In the Middle East, expect a scramble to build new pipelines as alternatives to shipping via the Gulf, which Iran showed it can shut down. Saudi Arabia’s pipeline to its west coast proved a vital lifeline for energy markets during the war. The UAE (United Arab Emirates) is rushing to build another pipeline that bypasses Hormuz, which it plans to finish in 2027. Iraq will likely try to hike pipeline exports via Turkey. Meanwhile, the region faces a hefty repair bill for its existing energy infrastructure, more than $50 billion, per one industry estimate. When the war is truly at an end, the Persian Gulf region will see an explosion in energy-related repair and construction.
For oil-producing nations elsewhere, the war spells potential new exports. Places that can boost supply and face lower geopolitical risk stand to be rewarded. Among them:
- Canada, whose hefty output was already gradually rising
- Argentina
- Brazil
- Guyana
- Venezuela, home to the largest oil reserves in the world by many estimates.
Venezuela's industry needs major investment after decades of mismanagement by its socialist government. But already, exports to the U.S. are up in the wake of the capture of former President Nicolás Maduro. The only American firm operating there now is Chevron. But others may cautiously join it in the coming years.
Note the geographical shift here: More oil output in the Western Hemisphere, far from the war-torn Persian Gulf. The U.S. will remain the world’s top oil producer, though it is unlikely to grow much more as our most productive oil fields mature and investors press energy firms to keep drilling costs down. But our huge production and extensive refining sector will anchor the growing energy industry in the Americas.
Natural gas
Lost oil exports have received most of the attention during the Iran war. But don’t overlook natural gas.
Prior to the war, about one-fifth of LNG (liquefied natural gas, superchilled for shipping) came from the Persian Gulf. The conflict halted that trade, and some LNG export facilities are badly damaged.
America, already the largest gas exporter, stands to grow in importance as it builds more LNG export terminals and continues pumping more gas to sell in overseas markets. With Middle East gas supplies in doubt and Russian LNG under sanction from Western governments, U.S. gas will be in even higher demand. While America’s oil production shows signs of flattening, gas output is growing. Nine LNG export facilities now operate in the U.S., with several more coming. America is becoming the Saudi Arabia of gas — a prolific supplier of a commodity that is vital for everything from power generation to space heating and fertilizer.
Being the world’s gas supplier is an economic boon, but one with caveats: How much of our gas bounty to export could become a political football, particularly as voters see their power bills soar and worry that exporting more gas will lead to still-higher utility costs. Energy-intensive industries will feel likewise. These debates are not new, but look for them to take on more urgency before long.
Petrochemicals
The Iran war will help prolong North America’s petrochemical cost advantage, which had been narrowing amid lower oil prices and global overcapacity. Due to America’s abundant natural gas, U.S. chemical makers use ethane as a feedstock instead of the oil-derived naphtha that dominates in Europe, Asia and Latin America. With global oil prices up almost 50% since before the war started and U.S. natural gas still at low prices, ethane now has a clear cost advantage over other countries’ naphtha.
Still, expect the industry to be cautious about ramping up domestic capacity, given the prewar state of the market, in which many older and higher-cost producers were under pressure. About 10 million tons of ethylene capacity was slated for closure, a number that could rise to 20 million tons, or 10% of global capacity, by 2028. An effort to increase domestic fertilizer production is already under way. The Department of Agriculture expects capacity to increase by more than 4 million tons, thanks to a revived and revised Fertilizer Product Expansion Program (FPEP). The FPEP will help fund new production facilities in Iowa and Washington.
The Trump administration has also focused on streamlining other requirements for fertilizer producers. Officials aim to complete the permitting for a new CF Industries ammonia plant in Louisiana in 45 days. Ordinarily, it can take years. Once completed, the facility will be the largest of its kind in the world, producing 1.5 million metric tons of ammonia annually.
OPEC
Back in the Middle East, the Iran war poses a threat to OPEC’s dominance of the global oil market. Overshadowed by the fighting was the recent news that the United Arab Emirates, one of the oil cartel’s biggest producers, is leaving and pursuing its own energy policy. With Saudi Arabia, the UAE had long worked to balance oil markets by adjusting its output up or down to keep prices stable at levels that work for OPEC members. Now, it stands to pump more of its crude oil, lessening the cartel’s ability to control prices. That suggests greater volatility ahead, especially if more OPEC members decide they are better off operating on their own.
This forecast first appeared in The Kiplinger Letter, which has been running since 1923 and is a collection of concise weekly forecasts on business and economic trends, as well as what to expect from Washington, to help you understand what’s coming up to make the most of your investments and your money. Subscribe to The Kiplinger Letter.
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