Tim’s view
The war in Iran has pushed oil prices to their highest level in years. But even if near-term security in the Strait of Hormuz improves, a longer-lasting cost to global energy markets waits ahead — and just how much that cost will be is the market’s most pressing question.
After the Saudi-led oil embargoes of the 1970s, the US and other countries created the modern framework for global energy security, including the establishment of strategic oil reserves and the International Energy Agency, export controls, and more domestic drilling.
What will change after the current crisis? Dan Yergin — author of the definitive oil history The Prize and, as vice-chairman of S&P Global, emcee of the sprawling CERAWeek energy conference in Houston next week — predicts “we’re going to see people willing to pay more of a price for security.”
That premium will manifest in different forms, Yergin told me. Certainly it will include investments in nonfossil energy sources. But it will also appear in new oil and gas pipelines to hedge against future disruptions to maritime trade. It will appear in the form of more long-term storage facilities and refineries, in more far-flung locations that suddenly look more politically and financially viable as the Gulf becomes more volatile. And it could appear in energy trading contracts, with long-term deals commanding higher prices over the spot market: “The just-in-time world is really over,” Yergin said.
As to who will pick up the bill for the security premium? It will likely be shared between fossil fuel producers, their customers, and taxpayers in general, Yergin said. The current price spike looks like a multibillion-dollar windfall for oil companies — but it’s one they don’t seem to want, given the chaos and risk required to achieve it. Even though the vulnerability of the Strait has been obvious for decades, Yergin said, there was a sense of “complacency from all quarters” about how costly the disruption caused by a war like this would be. Now, he said, that sense “obviously is gone.”
Notable
- The Iran war should teach fossil fuel-reliant countries a lesson, the UN climate secretary told Reuters: “If there was ever a moment to accelerate that energy transition, breaking dependencies which have shackled economies, this is the time,” Simon Stiell said.