Low-Energy Fridays: How could oil markets look after a peace deal with Iran?
While it still seems to be a long way off, Iran and Trump seem to be considering the conditions they need to make peace. As I’ve noted in past Low-Energy Fridays, peace is better for the economy than war, which destroys productive resources and erodes investor confidence. But we must also understand that the way in which this peace is achieved may impact energy markets in the long term. While any peace is generally better economically than the status quo, risks caused by the war may remain even after a deal is made.
Two long-term impacts of the Iran war could keep prices high: the physical damage to energy infrastructure and the risk of future disruption to the passage of energy via the Strait of Hormuz.
On the first point, several energy export and production facilities in the Persian Gulf have been damaged, including oil refineries in Saudi Arabia, Bahrain, and Kuwait. In the natural gas sector, a facility in the United Arab Emirates temporarily shut down following damage caused by debris from intercepted missiles. Even more seriously, the Ras Laffan liquefied natural gas (LNG) export facility in Qatar sustained so much damage that 17 percent of Qatar’s LNG exports will be offline for at least three years. Qatar is responsible for nearly one-fifth of the world’s LNG trade, making this a potentially significant disruption for the European and Asian countries that rely on those LNG shipments.
The fog of war makes it hard to know how much damage has been done to energy facilities in the region, and there seems to be some confusion as to whether what’s left of Iran’s leadership intended to strike these facilities or if lower-ranking individuals were attempting to retaliate against any potential target within reach. Should these facilities—or the energy production facilities within Iran itself—be destroyed, it would likely take years to restore them to full functionality. (For context, it takes three to five years for a new LNG terminal to become operational.)
The economic impact can be lessened if alternative oil and gas suppliers increase output or if consumers shift to other energy sources; however, oil demand is always high—even at extraordinary prices. This means that if the war ends only after widespread destruction of the region’s energy facilities, then oil and gas prices could remain elevated for several years. Obviously, achieving peace without the loss of these facilities would be better for the economy.
The other important issue is how the risk of future conflicts in the Persian Gulf can manifest in prices, which increase with the mere threat of an event that could disrupt global oil supplies. If the current conflict ends because the United States acquiesces to Iran’s strategy of putting a chokehold on the Strait of Hormuz, it will send a message to Iran that the strategy is effective and could be employed again in the future. Living under the cloud of a future Strait closure, markets must consider such an event in their pricing of oil and gas that relies on that passage.
A peace deal resulting in confidence that Iran no longer intends to threaten its neighbors would reduce risk and result in lower prices. However, if a post-war Iran is likely to close the Strait again to pressure the United States, then we should expect long-term pricing of commodities transiting the Strait to be higher than they would have been without the war.
While peace is good for the economy, a lasting peace where investors feel confident in the safety of their enterprises is better than peace achieved through scorched earth policy or by caving to energy price pressure. Consequently, the long-term effects on energy markets from the war with Iran are still too early to predict.