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

Loss of?barrels, and increased prices are already signs that the Iran war has disrupted global crude oil and gas markets. With a U.S. peace deal with Iran expected to reopen Strait of Hormuz in the near future, it's time to assess whether this was a 'watershed moment or just another blip.

Consider two precedents.

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

The 2022 Russian invasion of Ukraine sparked a dramatic rise in energy prices. However, the market was able to absorb the shock and reroute the flows, so the impact was short-lived.

The market has certainly worked its magic to close the Strait of Hormuz effectively 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 the optimism surrounding a possible agreement to reopen Strait, believing President Donald Trump’s social media posts suggesting that an accord was 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 to allow vessels to resume their transit. Trump announced on Monday that oil tankers had begun to leave the Strait.

The full details of this agreement are not yet public, but the prospect that tankers will soon be able to enter and exit the waterway with no hindrances raises the question of 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 if the barrels lost are replaced. However, this will depend on the speed at which Middle East producers can ramp up production and exports and if the OPEC+ 'group is able to produce the higher volumes that it has agreed to.

CHANGES IN BEHAVIOUR?

The longer-term effects are the more important question.

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's?policies will also shift towards promoting renewables and electricity 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,?wind turbines, and?battery-storage from China or developing local industries with Chinese backing.

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 it more difficult to reduce carbon emissions.

Importing coal is also an option for some countries, as the main exporters, such as Indonesia, Australia, and South Africa, are reliable suppliers, and shipments won't be at risk due to chokepoints, like the Strait of Hormuz.

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

It may not be difficult to get people to forget about the previous crisis if prices are kept low and drop quickly. Brent fell 4% from $83 to $83 immediately after 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 the columnist, who is an author for.

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(source: Reuters)