Three-line summary
△ Global oil inventories have fallen sharply as the U.S.-Iran war drags on and Middle East supply disruptions mount, pushing crude back above $100 a barrel.
△ Falling Chinese oil demand is capping the rally, but continued supply shocks from the Middle East point to greater uncertainty in oil markets for some time. The International Energy Agency expects a demand shock this year comparable to the one seen during the COVID-19 pandemic.
△ High oil prices could accelerate electrification and the shift to renewables while also spurring investment in new fossil fuel infrastructure, leaving the petroleum age at a crossroads, analysts say.
Crude oil has again topped $100 a barrel, a level widely seen as a psychological threshold. The United States and Iran have resumed fighting and are striking tankers belonging to each other or to third countries, while Yemen's Houthi rebels and Saudi Arabia move toward all-out war — leaving both of the world's main energy shipping routes, the Strait of Hormuz and the Bab el-Mandeb Strait leading into the Red Sea, once again engulfed in conflict.
Few likely believed U.S. President Donald Trump's assurance that "the war will be over in four weeks." But not many appear to have expected the conflict to last seven months either. This article examines where the global oil market goes from here, and whether expensive oil speeds up the energy transition or slows it down.
Inventories at a danger level
This is not the first time oil has traded in triple digits. What is different now is that global oil inventories are shrinking rapidly as the war stretches on far longer than expected. Global stocks of crude and refined products fell by roughly 400 million barrels from January through August, according to the U.S. Energy Information Administration on the 9th. Supply disruptions stemming from escalating U.S.-Iran tensions are cited as the main cause. The EIA said energy shipments through the Red Sea, which had served as an alternative to the Strait of Hormuz, plunged after armed clashes broke out between Saudi Arabia and the Houthis. Crude production shut in across the Middle East rose to 6.7 million barrels a day last month from 5 million barrels a day in July.
The Financial Times reported that China has been aggressively buying Iraqi and Saudi crude. What is notable is that the purchases have continued even as Chinese oil consumption declines. The impact of falling Chinese demand on the global crude market is examined in more detail below.
Refined products are in even tighter supply. Diesel prices have surged after Russia imposed an export ban following Ukrainian attacks on its refining facilities. Lost product supply from Russia and the Middle East amounts to about 2 million barrels a day each, or 4 million barrels in total. Russell Hardy, chief executive of Vitol, the world's largest independent energy and commodities trading house, warned that global product inventories are close to empty.
The swing buyer put to the test
With stockpiles draining, analysts say prices could climb further than expected after months in which gains were held back by concerns about oversupply. Notably, prices have not slipped even after forecasts emerged of a steep drop in Chinese oil demand this year.
The Economics and Technology Research Institute under China Petroleum & Chemical Corp., or Sinopec, projected that China's average daily oil demand would fall by 600,000 barrels this year, down 8.9% from a year earlier. In June, the China Petroleum Planning and Engineering Institute under China National Petroleum Corp. forecast that Chinese oil consumption would fall 4.9% from a year earlier to 753 million tons, citing the shift to new energy sources and high prices. For now, though, the market appears more focused on supply than on demand. Global oil exports are running short by about 10 million barrels a day, or roughly 10% of world demand, according to tanker-tracking firm Vortexa. Business Insider, the U.S. financial news outlet, said $100 oil has put China to the test after years in which it acted as a swing buyer, moderating prices through its purchases.
An accelerated exit from fossil fuels?
As this series has noted, the Middle East oil shocks of the 1970s served as a catalyst for the development of alternative energy sources such as nuclear power and renewables. The same applies to the current U.S.-Iran war, except that this is a different kind of energy transition than in the past.
The Financial Times recently published an analysis under the headline "Pricey oil is laying the groundwork for its own decline" — in other words, expensive crude may hasten the exit of hydrocarbons. One piece of evidence the paper cited was Africa, a heavy user of Middle Eastern oil and gas, where solar installations are projected to grow 45% this year. Africa imported $2.4 billion worth of Chinese solar panels over the past 12 months, enough to displace roughly $10 billion a year in diesel costs. Another is that countries dependent on liquefied natural gas imports, including South Korea, Thailand and Pakistan, are increasingly turning to alternatives such as nuclear power and renewables.
Coal consumption has of course jumped as oil and gas supplies were abruptly curtailed, but that could change with the course of the conflict. The IEA projects global coal consumption will reach a record 8.94 billion tons this year. At the same time, the agency said coal use could fall again if shipments of Middle Eastern oil and gas resume.
It may end at an exit from Hormuz
Could the opposite happen? Expensive oil may reinforce hydrocarbon inertia rather than speed the energy transition. Supply from outside the Middle East is in fact expanding as a result of the current crisis.
The United Arab Emirates, which quit the Organization of the Petroleum Exporting Countries in protest at Saudi-led output controls, plans to double its pipeline capacity to 3 million barrels a day by next year from 1.5 million now, according to Axios. Supply volumes are expected to rise accordingly. Non-OPEC+ producers such as the United States and Guyana are also moving quickly to boost output to replace Middle Eastern barrels. These are the same producers that stoked fears of a global glut before the U.S.-Iran war began. That suggests an exit from Hormuz does not necessarily mean an exit from fossil fuels.
The crisis may also create an economic incentive to keep newly built LNG terminals, pipelines, storage facilities and oil fields running until the heavy investment behind them is recouped — a force working against expanded spending on alternative energy.
So how long will oil stay above $100? There is a reasonable chance the level does not hold for as long as expected, because supply could rebound quickly if Middle Eastern production recovers alongside higher output from non-OPEC+ producers. The EIA forecasts an average of $90 in the second half of this year, falling to $77 in the second quarter of next year and $67 in the second half.
High prices could also curb consumption and drag crude back down. The IEA expects global oil demand to fall by an average of 2.5 million barrels a day this year from last year, the largest annual decline since the COVID-19 pandemic in 2020. The drop in supply is even steeper. The agency projects global oil supply will fall by an average of 5.7 million barrels a day this year, leaving supply short of demand by about 1.75 million barrels a day.
This article has walked through the scenarios for how long $100 oil lasts and whether it hastens the end of the fossil fuel era. Expensive oil and gas improve the relative competitiveness of electric vehicles, renewables and nuclear power, but they also give governments an incentive to build more secure oil and gas supply chains. Whether this war brings forward an exit from fossil fuels or merely an exit from Hormuz depends on which of those two forces proves stronger.
Related Petro-Electro articles
① Twenty percent of oil and gas vanished: the hard-landing decarbonization scenario the war exposed
② The bridge to decarbonization wobbles: an energy dilemma surfaces
③ The buyer of last resort for crude has changed: is China becoming an electric state?
④ A tangled solution for Hormuz as the Middle East's petro power weakens
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