Is the Iran War just an energy shock or a turning-point? Russell

Losses in barrels of crude oil and increased prices are already a result of the Iran war. With a U.S. - Iran peace deal expected that will reopen the Strait of Hormuz the reckoning has begun: Was this a watershed or just another blip, we ask?

Consider two ?precedents.

Volkswagen's "Dieselgate", a scandal involving rigged emission tests in 2015, seemed innocent at first. But it signalled the end of diesel cars for passenger vehicles and the rise in electric vehicles (EVs).

The impact of Russia's invasion of Ukraine in 2022 was short-lived due to the market's ability reroute the flows and absorb shock.

The'market' has'so far acted as a magic wand to deal with the effective closing of the Strait of Hormuz, since the U.S. and Israeli attacks against Iran began on 28 February.

Iran, Iraq, Kuwait and the United Arab Emirates have all lost at least 1 billion barrels worth of crude oil.

The narrow waterway that separates Iran and Oman also traps up to 20% of the global supply of liquefied gas.

The combination of strategic and business inventory releases, as well as a dramatic drop in crude imports from China, the largest crude importer in the world, have helped to keep Brent crude futures below $100 per barrel during the current crisis.

One could argue that traders were influenced by President Donald Trump’s social media posts indicating that an agreement would be imminent.

The long-awaited agreement began to take shape on Sunday, when the U.S. announced that it had reached an agreement with Iran on a framework which could allow vessels to resume transit. Trump announced on Monday that oil tankers had begun to leave the Strait.

The agreement is not yet public, but the fact that tankers will soon be able to enter and exit the waterway with no hindrances raises questions about what comes next.

First, the energy markets would receive a temporary sugar rush of relief as trapped tankers in the Gulf leave and deliver their cargoes.

The next step would be to try to restore the supply chain and flow of goods to their pre-war level, followed by a longer process to rebuild depleted stocks.

The price of crude oil and 'LNG could stay high for longer, as barrels lost are replaced. However, much depends on how quickly Middle East producers can ramp up production and exports. Also, whether the OPEC+ is able to pump the higher volumes they have agreed to produce.

CHANGES IN BEHAVIOUR?

The bigger question, however, is the impact on long-term.

The views of consumers and governments will be crucial, particularly in Asia, which is the fastest growing region, where energy consumption is high.

Customers who can change their minds are more likely to switch to hybrid or electric vehicles in order to protect themselves from future price spikes for diesel and gasoline.

Australia, which is the largest diesel importer in the world and relies on foreign refineries to meet over 80% its fuel needs, provides an early glimpse of what this could look like.

In May, Australian EV sales reached a new record, with a 20% market share. When combined with hybrids, this share increased to 46%.

In China, which is the world's largest EV producer, EVs and hybrids will account for more than half of all sales by 2025. This figure rose to 60% this May.

The government is also likely to change its policies in favor of renewables and electricty over fossil fuels.

Dieselgate has seen the motor fuel lose popularity, particularly in Europe where its share in passenger car sales fell from 52% in 2015, to less than 10% in 2025.

Asian countries like Vietnam have already put in place policies that encourage electric scooters and EVs. This momentum will likely grow throughout the region.

In Asia, LNG is also a threat as countries weigh up the security risks associated with an imported fossil fuel versus buying solar panels, battery storage, and wind turbines?from China or developing local industries with Chinese support.

Coal is one fossil fuel that could emerge as the long-term victor of this crisis.

China, India, and Indonesia are all countries with large reserves of domestic fuel. They will continue to use it because they can afford it and have a reliable supply, even though this makes reducing carbon dioxide emissions more difficult.

Importing nations may also deem coal as a safer investment, since the major exporters, Indonesia, Australia, and South Africa, have been reliable suppliers for many years and that shipping is not at risk due to chokepoints such as?the Strait of Hormuz.

But a long-term move away from crude oil or LNG is not guaranteed, since the producers and exporters are unlikely to accept their demise.

It may only take a rapid drop in prices and a prolonged period of low prices to make people forget about the previous crisis. Brent fell 4% to $83, on the?announcement of the deal, suggesting that this process is already underway.

It's possible for governments and consumers to forgive and forget about the costs and disruption of the Iran War, just as they did in the past after price spikes caused by conflict. The views expressed are those of author, a contributor to.

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(source: Reuters)