https://www.ons.no/the-energy-agenda/reports-1

The energy crisis of 2026 is spreading.   

The stock market’s expectation of a rapid return to normality has been overtaken by the resumption of conflict between the US and Iran. The Strait of Hormuz has now been almost completely closed for 150 days. Since the ceasefire broke down on July 8th there have been two weeks of intensive attacks on Iranian facilities along the coast – for instance at Bandar Abbas and on the Goruk and Queshm islands.    In return Iranian missiles have targeted energy related facilities in countries hosting US troops including Kuwait and Bahrain.  There is currently a pause but the legacy of the conflict remains with reports of a tanker exploding after contact with a mine in the sea close to the Strait of Hormuz last weekend.  

The exchanges since July 8th have added  to the damage done in the first phase of the war.  Repair work has barely begun not least because the international construction industry cannot operate effectively in a war zone.  Another ceasefire is under discussion but shipowners and the insurance sector trust neither the Iranian leadership or the US Government to reach a genuinely sustainable agreement. Both therefore remain very wary of the whole region.  Shipping insurance rates in the Persian Gulf and the Strait of Hormuz have risen from 2 per cent of hull value to 3 per cent over the last three weeks. The number of ships passing through the Strait has returned to minimal levels after a brief uptick.

Governments, businesses and consumers have begun to adapt to the prospect of a sustained closure and minimal trade through Hormuz.  Key sectors such as fertilisers and petrochemicals are beginning to find new sources of supply and routes to market but the costs, particularly of transportation, are high. We have not yet seen the full inflationary impact of what has happened this spring.   That will come through the autumn and winter as shortages and adjustment costs feed through international supply chains.

The US Iran conflict is no longer, however, an isolated event.  The market is now facing four other developments which will compound the problems arising from the US Iran conflict.

On the eastern side of Arabia the Houthis – the protest movement aligned with Iran – has escalated it’s long standing conflict with Saudi Arabia by threatening a blockade of shipping to and from Saudi ports.  That include the port of Yanbu at the end of the East West pipeline which crosses Saudi Arabia.  For the last six months the line has been providing a much needed export route for oil and gas which cannot pass through Hormuz.  The Houthis have Iranian support but are not completely controlled by Tehran. Their grievances are distinct and risk taking a conflict which began in the Persian Gulf into new geography.

The Houthi threat if carried through would close  the Bab el Mandeb Strait ( in English the Gate of Tears ) at the southern end of the Red Sea which is normally the transit route for oil, gas and much wider trade.  Some 25 to 30 per cent of global container traffic usually passes through the Red Sea and the Suez Canal.  If the Strait is closed the only alternative routes for oil are the Sumed pipeline which runs through Egypt, and the Suez Canal.  The pipeline’s capacity is limited and the Suez Canal cannot handle larger tankers.  In any case any oil or gas passing through Egypt faces a four week onward journey of some 3,500 nautical miles around Africa to reach destinations in Asia.  The Houthi threat has not yet been carried out in full, but there are already reports of tankers turning round rather than risking their safety in what must not be regarded as a conflict zone. The risks will increase if the Saudis pursue the retaliation which they have promised.  The closure of Bab el Mandeb would take another 12 per cent of oil trade off the market, and would seriously damage the Saudi economy.

The second problem is the intensification of the war between Russia and Ukraine.  While the ground war grinds on the Ukrainians have opened a new front with drone attacks on key energy infrastructure across Russia.  At least 10 major refineries including those at Omsk, Kirishi, Ryazan and Moscow have been damaged – some seriously

The Omsk refinery for instance been forced to suspend a large proportion of normal operations  for at least the next six months after drone attacks on two key units. The Moscow refinery – Kapotnya – is reported by the Carnegie Endowment to have been “knocked out”

According to analyses published by the Royal Bank of Canada, Reuters and others around 58 per cent of Russian refinery capacity ( ie some 4.3 million barrels per day ) have been attacked and damaged in some way with at least a quarter of total capacity now out of action.

Within Russia there are shortages of fuel, particularly of gasoline and diesel.  In many areas a rough rationing system limiting personal consumption is in place and there are long queues at petrol stations.

As a result of the attacks and the resulting shortages Russia has halted exports of gasoline and jet fuel and is reported to be considering a ban on diesel exports. and has been forced to import gasoline and diesel from India and Belarus.  With so much domestic refining capacity out of action more Russian crude is being exported mainly through northern routes because of the Ukrainian attacks on Russian shipping in the Black Sea.

As well as damaging the Russian economy and feeding public resentment about the failures of the Ukraine war, these shifts in trade are beginning to add to the pressures on European energy markets.  Refining margins are up and in a number of places stocks of some products have fallen to very low levels.  Prices for consumers dependent on imports – such as farmers, the trucking industry and the shipping sector - have risen.

The third factor causing concern is the renewal of Chinese oil imports.  Since the beginning of the Iran war China has severely restricted imports of crude and oil products and has relied on the large volume of stocks built up over the previous year when prices were low.  That approach has been one of the key factors in softening the impact of the closure of Hormuz over the last five months.

In June Chinese imports at around 7.3 million barrels per day were 41 per cent down year on year with particular reductions in imports from Iran, Russia and Saudi Arabia.   The reduction in imports benefitted the Chinese economy because of the balance of payments gain but also because China has a strong continuing interest in maintaining the stability of the international economy.

Five months on, however, it begins to look as if China cannot maintain a rigid ban on imports and will start to buy again on the international market in the third and fourth quarter. July imports are estimated to have risen sharply from June’s low base. A full recovery will depend on a policy decision to begin rebuilding stocks again.

These three factors operating simultaneously represent cumulative stress affecting both sides of the supply demand balance.

There is one more fact to take into account which is the decline in the level of global stocks. In their last report on the situation the International Energy Agency warned that OECD oil stocks were at their lowest level since 1990 and that at the current pace of drawdown persists stockpiles will soon be at critically low levels. In the  US for instance while commercial stocks are at normal levels the Strategic Reserve held by the Government is at the lowest level since 1983.  Numerous reports indicate that the situation is now reaching the point where for reasons both of energy security and practical management of the facilities involved only very limited further drawdowns of stock are possible.  The crucial point is that the stocks drawn down since the beginning of March have not been replaced.

The rapid drawdown of stocks has softened the impact of the closure of Hormuz Additionally the unwillingness of some countries including the UK to do anything to encourage a reduction in demand over recent months has meant that the signal to consumers which should have followed the closure of Hormuz has been much more muted than was necessary.   “People should keep on driving as normal” said one UK Minister.   To her and too many other policy makers the war in the Middle East can seem remote and unimportant but such complacency will come with a cost as the realities become apparent. 

What are the consequences of this cumulative stress ?

The overall macroeconomic impact of what has happened over the last five months has been expressed through rising costs and reduced growth.

As recent events have shown the impact has fallen unevenly. Petrochemical feedstock shortages for instance have been felt more starkly in Asia and parts of Europe.  The countries which are broadly self sufficient in energh such as the US have been negatively affected by the increase in global prices but have benefitted as some key supply chains – for instance for jet fuel – have been rebased to take advantage of available refinery capacity.  China prudently managed the market by building up stocks over many months before the war began.  The real economic damage is being felt by import dependent countries which lack the ability to absorb increased prices.

In general, there has been a new priorisation of security over climate concerns  but the tension between the two objectives remains.  Extreme weather and wildfires cannot be ignored but a full-scale energy transition remains a distant prospect. The infrastructure is not in place and the costs are still too high.  The hydrocarbon economy remains in place.

Everything else being equal the logical adjustment would be use supplies from elsewhere but the industry’s expectation that the shortfall would be met by a further relaxation of sanctions on Russia have now been taken off the table.  There is no other large scale source of short term supplies.

The longer-term search for substitute sourcesof oil and gas goes on on as does the discussion on alternative transit routes avoiding Hormuz.  But substitution is not an instant process. New pipelines across the Middle East potentially taking oil and gas through Turkey or eastwards to India are technically feasible but held back by economic and political barriers. Additional oil and gas fields off Brazil or Guyana or even in the Arctic would take years to develop.  So would the grids necessary to make use of wind and solar generated power.  All require large scale investment and confidence in future market structures.  The current level of uncertainty only serves to delay major investment decisions.

As the summer ends  the combination of these factors is producing a reassessment by those who those who expected a quick reversion to “normality”

Some argue that energy crises matter less to the global economy given the steady reduction in energy intensity per unit of GDP over the last few decades by as much as a third over the last twenty years.

The world has indeed become more energy efficient and there has been strong growth in sectors of the economy which are not energy intensive.  But the physical economy – sectors such as transport, chemicals, fertilisers, freight, construction, aviation and heavy industry are still dominant especially in the areas of the world which are growing more strongly.  The “weightless” element of GDP still depends on the physical economy which still relies to an overwhelming degree on the continuous, secure and affordable flow of energy – three quarters or more of which comes from hydrocarbons.   The next few months will show us just how important energy is to the global economy and the cost which has to be paid when events break down the security of supply which we have taken for granted.

Despite a new round of attacks with missile strikes on shipping followed by a heavy US attack on multiple sites in Iran and then the inevitable retaliation hitting targets around the Gulf, oil prices have barely moved and remain at pre war levels. The S and P 500 is up almost 10 per cent since the beginning of the year.  At the NATO summit energy security has barely been discussed. Crisis, what crisis?

Would that it were so simple.

Four facts suggest that the sense of energy insecurity produced by the war in the Middle East  remains completely justified.

1.        When the war began the International Energy Agency – the body established after the first oil shock in the 1970s was able to respond to the cut off of supplies by authorising a release of stocks by member states amounting to over 430 bn barrels of crude and products. Most of those resources have now been distributed, softening the impact of the loss of supplies which in normal times flowed through Hormuz.  But stocks can only be drawn down once and in the view of the IEA are now close to being at dangerously low levels – the lowest they have been since 2003.   A few tankers and other commercial ships are now moving through the Strait but the flow keeps being interrupted by sporadic attacks from both Iranian and US forces. The last 24 hours have seen Iranian attacks within the last 24 hours on the Qatari LNG tanker Al Rekayyat and a Saudi flagged crude oil tanker, followed by heavy US airstrikes against several targets in Iran and the reimposition of sanctions on Iranian oil sales.  In return Iran attacked US military sites in Bahrain and Kuwait and said that all US bases in the region are now legitimate targets.   The “agreement” between Iran and the US signed in mid June is barely holding.   The deal allows for a resumption of normal flows of shipping which has not yet happened.  Beyond that the terms are vague. There is no clarity on whether transit fees will be charged or not and no agreement at all on the key issue of Iran’s nuclear ambitions which were the original cause of the war.  The number of tankers moving through the Strait is still minimal with around 30 to 40 ships passing in or out each day – ie no more than a quarter of normal traffic.  Reports from the authoritative monitoring service Kpler suggest that much of the traffic which is flowing is Iranian flagged and is passing through the Iranian channel around Larak Island off the coast of Bandar Abbas.  Comments from ship owners such as Lars Barstad the Chief Executive of Frontline, suggest unsurprisingly that owners and insurers are not yet convinced that sending ships back into the Strait to collect new cargoes is worth the risk. There has been talk of mine clearing to be led by European governments but it is not evident that any mines have yet actually been cleared and some reports that there are no accurate records of where any mines lie.

2.        Secondly it is clear that the restoration of normality relies not just on the complete reopening of the Strait – with the threat of random attacks definitively removed - but also and crucially on the reopening of all the energy related facilities attacked during the war, and of the producing fields around the Gulf which relied on those facilities.  There is still no definitive analysis of the scale of the damage site by site.  In a number of areas full production cannot resume until the repairs of the full supply chain from the field infrastructure to the refineries to the port facilities are complete.  As a result, despite marginal increases in output from countries such as  Iraq in recent weeks production there is still running at around 30 per cent of pre war levels causing significant economic damage and setting up a conflict within OPEC over post war production quotas.  Iraq’s stated ambition to expand output to cover it’s short term revenue losses is just the latest indicator of continued instability.

3.        As the most recent data published by the IEA confirms a number of factors helped to limit the immediate impact of the war and the loss of the supplies which normally move through Hormuz.  A number of countries including Canada, Khazahstan and Brazil have increased production and exports.  The biggest contribution has come from the US where planned increases in shale oil production have effectively been doubled.   The East West pipeline across Saudi Arabia has managed to raise capacity by as much as two million barrels of oil per day but actual throughput is still constrained by the limitations of facilities at the western end of the line. A substantial proportion of the balance has been met by cutbacks in demand produced both by higher prices and by government measures limiting use through rationing in one form or another. Many Asian countries including the Philippines, Thailand and Sri Lanka have already imposed restrictions on oil consumption. In India large parts of the ceramics industry have been forced to halt production. Demand for oil across the world fell by 5 million barrels per day, year on year, in the second quarter of 2026. But apart from the release of stocks around the world the main change in the energy market since February has been the Chinese decision to reduce imports by 40 per cent – some 4.6 million barrels per day.  The Chinese had built up extensive stocks in the months before the war and the reduction of imports was entirely logical. In Japan too imports have fallen by 1.9 mmbd.   Such moves, however, cannot be repeated. A  continued absence of imports would do direct harm to a Chinese economy which is already weakened by high levels of debt.  As things stand in early July there are signs that Chinese oil imports are picking up again, no doubt taking advantage of the fall in global prices.  It is noteworthy that most of the demand reaction to the war has come in Asia – but perhaps that is not surprising given that some 84 per cent of the resources shipped through Hormuz normally headed east in the months before the war.

4.        There is then the wild card of Israel where the renewed strength and confidence of the regime in Tehran will renew the fears of Iranian intentions which triggered the conflict at the end of February. The regime in Iran has been strengthened by the war while Israel, along with many other countries, can no longer rely on Washington for protection.  At the immaculately orchestrated funeral of Ayatollah Ali Khamenei there were prominent banners calling for “revenge” for his death and open calls for the assassination of those responsible.  For those seeking revenge the US is a distant enemy. Israel is a closer target. The American retreat from an unfinished war which was evident in the ceasefire agreement will be hard felt in Jerusalem, but Israel is probably the least likely of all the countries in the region to accept passively the reality of the Iranian victory.

For all these reasons the oil market and the stock markets of the world are wrong in thinking that the crisis is over. The markets, led from America, appear to be trading on hopes of a diplomatic solution driven by President Trump’s desire to end the war as soon as possible and at any price.  In doing so they are discounting the physical realities of the energy market, the fact that power has shifted to Tehran and the number of serious conflicts across the region which remain unresolved.

Meanwhile the consequences for the supply chains dependent on crude and product exports from the Gulf continue to play out.

Global food supplies are still threatened because prices for products such as urea are still 60 per cent higher than they were before the war with a negative effect on fertiliser use and crop yields.

Petrochemical production in many Asian countries is still seriously constrained leading the businesses involved to seek alternative sources of supply regardless of costs and even in some cases to consider relocation.

The one third shortfall in the global supply of helium which is essential in the process producing microchips is beginning to affect supply chains in the semiconductor industries across the world.

In many sectors a process of adaptation is beginning – but at a cost. Jet fuel, which is the product in shortest supply because of the damage done to refineries in the Gulf, has been sourced from around the world often at very considerable cost. Travellers will find themselves paying more this summer.

One consequence of the war is now clear.  The impact of events over the last five months have fallen unevenly.  Europe in paying a price in terms of the cost of imports and a further loss of industrial competitiveness but has not yet experienced serious physical shortages. The burden has fallen on consumers and in some cases on the public finances.  Asia has experienced both shortages and price increases with China alone protected by the high level of stocks and the ability to cut back on imports.   The US has also seen price increases – most visibly for gasoline - but overall is an economic winner from the war with increased exports of oil, gas and  refined products and a Keynesian boost from public spending driven by the war. The longer-term effects, particularly to American credibility in the eyes of both allies and competitors have yet to be seen.  The exposure of the limitations of seemingly overwhelming military power may prove to be the most lasting strategic consequence of the last few months.

Around the world the political and economic effects of the war are becoming obvious.

The energy market is still responding to what had happened and has not yet found a new equilibrium. The war itself is far from over and the region on which so much of the world’s supply depends is if anything more unstable than ever. A stock market based on hope rather than the hard physical realities of supply and demand is not a reliable guide or a genuine measure of value.

Attached my paper written for the think tank Our Scottish Future.

https://ourscottishfuture.org/wp-content/uploads/2026/06/North-Sea-Energy.pdf

The attached article was written as part of the Centre for European Reform’s collection of views on the consequences of Brexit ten years on. The whole collection is well worth reading and can be found at https://www.cer.eu/ten-years-after-brexit-referendum

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https://www.cer.eu/sites/default/files/NB_brexit-10years_essays_22.6.26.pdf

“Let the oil flow”.  President Trump’s triumphant cry on his 80th birthday was intended to mark the end of the conflict with Iran and the beginning of a return to normality.  On this view the persistant optimism of the US stock market has been justified. The war and the interruption to supplies through the Straits of Hormuz was just a temporary blip which would soon snap back to the status quo ante.  Oil prices have fallen back and the influencers will soon be encouraging us to head back to Dubai.  All’s well that ends well.

Time will judge whether the upbeat mood is justified.  Others will be able to comment on the substance of the deal and it’s durability.   For the moment it is worth focusing on the impact of what has happened over the last 100 days on the international energy market and the consequences which set the context for what comes next. 

Two strands of thought are emerging about the impact on the energy market of three months of war and the closure of Hormuz. The first is that human beings, being naturally adaptive, are finding ways around all the problems caused by the war and the blockade.  The crisis, if not over, is being successfully limited.  We are learning to live without oil and gas from the Gulf.   The second concerns the impact of the war in the Middle East as the trigger for a rapid energy transition away from oil gas.  Both are myths, and dangerous because they divert attention from the much less comfortable reality. This post responds to the first myth and in a future post I will come back to the second.

The myth that the problems have been solved by adaptation was spelt out in an article in the New York Times on June 4th by Chrisopher Smart.  Smart argues that a combination of stock drawdowns and the development of alternative export routes from the Gulf have mitigated the impact of the blockade. In his words “we are learning to live without the Gulf’s seaborne exports.”  The longer Hormuz is closed “the less important the oil from the Straits becomes”. The blockade has caused disruption but  “The longer we live without Gulf supplies the easier it gets”.

Myths can only be countered by facts. 

The damage done since February 28th cannot easily be undone.

As a consequence of the blockade crude exports from the Gulf States are estimated to have fallen  by some 9 to 10 million barrels per day – with Iraq and Kuwait suffering the sharpest falls.   

Some 1,500 ships are trapped by the blockade and the trickle of those seeking to escape has been slowed by the latest round of attacks including the US attack on an Indian tanker on June 3rd killing three crew members.

The war has caused extensive physical damage to energy infrastructure across the region. A number of major  refineries in Saudi Arabia, Bahrain, the UAE, Kuwait and Iraq   have been hit as have the Ras Laffan LNG facility and the Pearl Gas to Liquids plant in Qatar.  Iranian export facilities have also been damaged. We do not know in detail the extent of the damage  or how long it will take to repair.  The tentative estimate from the consultancy Rystad is that the cost will be between $ 25 and $ 58 billion – figures which suggest that the capacity of the skilled construction sector will be very stretched when the war ends.

In some cases oil and gas production which is currently shut in cannot be restarted until the facilities are fully operational again. 

The impact beyond the energy market has continued to escalate as anticipated in the Substack article I published on May 10th.  Nothing has changed for the better.

The absence of feedstocks essential for the production of fertilisers has begun to restrict food supply.  Each part of the supply chain is affected.  Farmers across the world are facing rising prices for both energy and fertilisers. Farmers in poorer countries who lack the ability to pay the higher prices are cutting back their use of fertilisers. That will reduce crop yields. Processors and traders face rising fuel and freight costs while retailers at the end of the chain will find their costs rising and their margins squeezed down by consumer resistance to increasing costs.

In the developed world the impact will be felt through rising costs.  In the world’s poorer countries the problem is a physical shortage of supply.  The World Food Programme has warned that an additional 45 million people are now facing acute food insecurity adding to the problems which already existed before the war.  Acute shortages are already evident according to the WFP in countries such as Somalia, Sri Lanka and Afghanistan.  In some countries the problem is compounded by the loss or reduction of remittances from migrants working in the Gulf States.

The petrochemicals sector is also suffering with sharp increases in prices of energy and naptha  as a result of the blockade and attacks on export oriented facilities at Ras Laffan and Mesaieed in Qatar and Ras Tanura in Saudi Arabia.  With 60-70 per cent of their naphtha supplies and 45 per cent of LPG normally traded through Hormuz,   Asian petrochemical businesses have been particularly badly hit, leading to reductions in production and forced majeure closures of facilities in countries across Asia. 

As a result trade through supply chains of products such as polypropylene and polyethylene across the world has been constrained leading to competition for supplies added price pressures and some physical shortages for captive buyers in Europe and elsewhere. 

Other sectors are being affected in different ways.

The Gulf refineries were the key source of helium providing around a third of global supplies to business producing semiconductors and other forms of electronics.  Helium also acts as a coolant in data centres,  and is essential to medical imaging involving the  use of magnets and to research and manufacturing activities involving low temperature physics.    The shortage of supply of products which have no available substitutes  has led to price increases of 50 to 100 per cent, strong competition for whatever supplies are available  and substantial re prioritisation of use sector by sector. 

The knock on effects are already evident. The impact on the semiconductor and advanced electronics industry for instance  has begun to feed through the supply chain to the automotive sector, consumer electronics and the manufacturing of hardware for the rapidly growing AI business.

The shipping industry is disrupted not just by the loss of the ships trapped behind the Hormuz blockade but also by the absence of the extensive and lucrative trade in goods into the Gulf States from both Europe and Asia.  The industry is having to reroute other global trade flows around the Cape of Good Hope – adding to the journey times and the fuel consumption involved.

The airline business has been hit by increased jet fuel prices which are currently around double  their prewar level with the effect of the loss of crude supplies compounded by the reduction in middle distillates from the export refineries in the Gulf.

Jet fuel accounts for some 20 to 40 per cent of airline costs. The value of Airline stocks fell by an estimated $ 50 bn in the first few weeks of the war and several smaller companies including Spirit in the US, Lufthansa Cityline, Jetflite in Finland and Zenith have gone out of business.

A few airlines such as Quantas and Easy Jet had successfully hedged part of their risks  in terms of supply but still face added costs.  Most airlines worldwide are having to absorb or pass on the increased costs to the travelling public.  For the national carriers such as KLM and Iberia with large jets flying long distances fuel costs pose the main challenge alongwith the cutback in discretionary corporate travel and the reduction in flights to the Middle East. For the low cost budget airlines with smaller planes, generally travelling much shorter distances, the sharpest impact comes from the effect of increased prices on consumer demand. The Gulf state owned airlines which have been damaged by both a loss of business and by the continuing risks associated with flying in the airspace close to a war zone have been the most severely affected part of the sector.

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Of course human kind is famously adaptive but as history shows adaptation takes time and in this case requires the availability of the means of replacing substantial supplies of oil, gas and refined products on which the global economy had become dependent. 

The steps taken since the war began do not amount to fundamental adaptation. As a result the negative consequences of what has happened will grow with each successive week.  

Step 1 has been to increase the volumes of oil coming from the Gulf States by other routes.  The East West line in Saudi Arabia from Abqaiq to Yanbu on the Red Coast is taking more oil  and is now the main export route from the region.  However the quoted maximum capacity of 7 million barrels per day  is  constrained by the limited capacity of facilities at Yanbu and in the Sumed pipeline which takes the oil from Yanbu to Egypt.  The much smaller line which runs across the UAE from Habshan to Fujairah on the Gulf of Oman is carrying some 2 million barrels per day.

Both are now working  at close to maximum practical capacity.  New lines are under discussion but would take years to build particularly given the need for new processing facilities in addition to the basic pipelines.

Step 2 has been increases in production elsewhere – from countries such as Canada, Brazil and Kazakhstan. The most substantial addition has come from the United States reflecting the growth in output of shale oil and gas, although the added exports involved are vulnerable to a change in US policy to protect domestic consumers from rising prices. 

According to estimates from the IEA  the total addition to supplies from non Gulf States amounts to some 1.1 to 1.2 million barrels per day

In Petrochemicals some adaptations have occurred with India taking advantage  of the availability of Russian crude.

All these additions have helped mitigate the situation to some extent  but they have not matched the loss of resources since beginning of March.

The remaining gap has been filled in two ways.  Some 400 million barrels of emergency stocks have been released under arrangements coordinated by the IEA with the largest shares coming from the US and the balance mainly provided by Canada, Japan, Germany and Korea.

Stock drawdowns have certainly been the major force  softening the impact of the war over the last three months but the rundown is now approaching it’s natural limits.  National security concerns will deter a rundown of stocks to unacceptably low levels and there is already evidence that a number of countries  including China, India and most recently Russia are constraining exports of specific  products in defence of their own needs.

The residual gap between production and consumption has been filled by demand  destruction. The most recent estimates suggest that global demand this year will be around two million barrels per day below previous forecasts but a continuing blockade would lead to a further cut back. Some of the reduction reflects conscious public policy decisions. Some is the result of decisions by businesses and consumer driven by their inability or unwillingness to pay increased prices.

Another largely unnoticed part of the substitution process has the revival of the coal business.   European thermal coal prices have risen by between 25 and 30 per cent with coal use in the power sector higher than predicted in Germany, Italy and Poland.  In Asia Japan has expanded the use of older coal plants in place of some LNG imports, South Korea and Taiwan have increased coal fired power generation, and in both China and Japan there has been a revival of coal based petrochemical sectors.

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The result of all this is not a sudden global economic crash.  Some sectors of the economy  in some individual countries are having “a good war”.  The US has benefitted from increased demand for it’s oil and gas exports. The refineries located along the coast of what used to be called the Gulf of Mexico have gained new global business not least in supplying jet fuel to the Far East at prices reported to include trades at close to $ 200 per barrel.

The US has also benefitted from a surge in public spending on the war estimated by Linda Bilmer the authoritative analyst of defence economics at  the Kennedy Centre at Harvard to amount to $1 trillion.   The defence industry across the world is having a bumper year with demand for drones and munitions driven up by the numbers of both used in both the Gulf War and the conflict in Ukraine.   

But the cumulative effect of what has happened is inflationary and directly  challenging to a number of industries and countries whose competitiveness has been damaged.  The European petrochemical sector for instance looks set to face serious rationalisation adding to the trend of deindustrialisation.  Trade in food and other products from emerging market economies which require  is down because of the increased costs of energy for the necessary  long distance transportation. Tourism  and hospitality have also been hit.

The impact of the war is destabilising and destructive in many ways.  Uncertainty is discouraging new private investment across many sectors from construction to advanced manufacturing.   Bond markets have  seen a sharp rise in yields driven both by uncertainty over public finances in many countries, not least the UK where the annual cost of servicing the national debt is now double the amount being spent on defence.

Political discontent with many Governments which are struggling to offer credible answers has increased and there has been a noticeable growth in support for parties offering populist solutions – not least in the UK, France and Germany.

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Stock markets have remained sanguine and in some cases valuations have strengthened presumably on the basis of a belief that the war is no more than a temporary incident which will be resolved by mutual exhaustion.   The markets appear to be applying too much of their own logical thinking to a conflict between two sides who are not primarily driven by rationality. 

There have been repeated surges of hopes  that a deal could be reached by the US and Iran – usually pushed on by President Trump who has proclaimed the imminent reopening of the Straits  on several occasions over the last two months. 

The peace “settlement” now reported to have been agreed  has not been published in full (let alone signed) but from what is known the document is no more than an interim step towards more substantive negotiations not just on the future of the Straits but also the more difficult issue of of Iran’s nuclear programme and the stockpile of enriched uranium.

The Iranian Government appears to have consolidated it’s hold on power with a new core leadership group including the Speaker of the Iranian Parliament Mohammed Ghalibaf, Ahmad Vahadi  a senior figure in the Revolutionary Guard and Mohammed Zolghadr, Secretary of the Supreme National Securiity Council.  Although the Iranian economy is weak this group seem determined to stretch out negotiations and  to play on President Trump’s desperate desire to find a way out of the war.   Iran appears now to have won major concessions simply for reopening the Straits.

Whatever the rhetoric from the White House it is clear that a deal signed this week will not enable the easy resumption of normal trading conditions.  The extent of the damage done is one major barrier to any return to normality.  The second concerns the logistics involved – the need for the ships currently trapped behind the blockade to emerge and to take their cargoes to destinations in Asia or Europe – a process which will take several weeks before the ships  return to pick up new cargoes - journeys

which will take  still more time. The third barrier concerns the willingness of ship owners, and the suppliers of their insurance,  to venture back into an area which in the absence of any full settlement remains a conflict zone.

The result after 100 days is not  an economic collapse but a corrosive weakening of the global economy.   The impact is uneven.  The US is the closest to benefitting from the war while other developed economies will cope but will see growth prospects reduced and public finances weakened.  The worst affected are the world’s weakest economies.  Low income, energy importing countries are vulnerable because they lack strategic stocks and have no ability to subsidise consumer prices for energy, food and other products which have been affected by inflation.  The rising cost of borrowing is an added burden for public finances in countries already deeply endebted.  Many countries are being forced to reduce working weeks and to cut public spending.  Poverty levels are increasing in the poorest countries especially in Sub-Saharan Africa while other, middle income, economies particularly in Asia are experiencing slower growth and rising unemployment as worldwide supply chains are broken.  The impact of the war varies from one country to another but will have the general effect of increasing poverty levels which were already under severe pressure because of the decisions to end development aid made by the US and UK governments. 

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The impact of what has happened over the last hundred days cannot be erased overnight.  The consequences will endure even if the Straits are fully reopened.  The war has demonstrated our continued reliance on oil and gas and the fragility of the open globalisation which we took for granted.  We have reached a break point but not the end of the story.

Discussion of the impact of the conflict in the Persian Gulf on the international energy market is clouded by the fog of war; by uncertainty about the intentions of President Trump and the new Iranian leadership  and by the reluctance of many Governments to admit the scale of the challenge .  This is therefore a good moment to lay out a fact based summary which will help readers to draw their own conclusions about the consequences of what has happened since February 28th.

1.        In normal times around 100 to 140 vessels including 50 to 55 tankers carrying oil, liquefied Natural Gas, fertilisers, petrochemical feedstocks and refined oil products passed through the Straits of Hormuz each day.  Since early March that flow has reduced to a trickle.  One recent estimate suggests that some 1900 to 2,000 vessels including between 100 and 200 tankers  are stranded in the Gulf.

Because of the journey times involved the last of the tankers and other ships which passed through the Straits before the war began have only recently arrived at their destinations in Asia and Europe.  Following their arrival the flow of supplies has now dried up.  This means that we are now at the end of the beginning and that economies around the world are starting to feel the impact not just of the fears and speculation reflected in rising prices but also of physical shortages.

 1.        The problems we now face are not simply the result of the closure of the Straits.  The Iranian response to the attack by the US and Israel has amplified the impact of the closure by targeting energy related infrastructure located in areas around the Gulf.  These attacks have continued since the nominal ceasefire came into effect on April 7th/8th causing damage to facilities such as the petrochemical plant at Ruwais, the Habshan and Shah gas plants in Abu Dhabi and the alternative transit routes - the East West pipeline in Saudi Arabia and the port of Salalah in Oman. The overall extent of the damage done is unclear but in some cases is obviously substantial.  At least eight significant Gulf refineries are fully or partially out of action.  So is the Ras Laffen LNG facility in Qatar.  The Qatari Government has said that that reconstruction of the facility could take 3 to 5 years.  Repairs to the refineries, which are complex modern industrial plants, is likely to take many months at the very least.  Facilities in Iran, including the refinery at Laban Island, have also been hit but there is no clear evidence of the extent of the damage they have suffered.

2.        In contrast to the energy crises of the 1970s the shortages now developing are not focused on crude oil but on oil products which are created through the refining process.  An excellent detailed explanation of this is available in the Substack  Crack the Market.   (https://crackthemarket.substack.com/ )Those managing the crisis or wanting to understand the challenges of the next few months should read that analysis. 

3.        The main shortages which are now evident are in products such as jet fuel and diesel.  Before the war Europe imported 60 per cent of its jet fuel needs from the Gulf region.  The UK was overwhelmingly reliant on jet fuel supplies from the region.  The refineries of the  Gulf states in Saudi Arabia, the UAE and Kuwait also supplied a large proportion of Europe’s requirement for diesel - the main source of fuel for freight lorries and other key transport uses including crucial links in the extended food supply  chain. The shortage of jet fuel and diesel is global and the intense competition for supplies is pushing up prices which are rapidly passing through the chain to the end consumer.

 4.        The impact of what had happened so far has been softened over the last two months by the drawdown of stocks – in total worldwide amounting to some 400- 500 million barrels - but stocks can only be drawn down once and will need to be rebuilt (if supplies are available) over coming months  – an issue which suggests that the optimistic forward price curve which currently forecasts a fall in prices to around $ 80 by this time next year is over optimistic.

5.        The normal response to disruptions in any market is a search for alternative sources of supply.  In this crisis, however, the availability of substitutes is limited.

The only available alternative export routes for oil from the Gulf are the East West line across Saudi Arabia from Abqiaq to Yanbu on the Red Sea coast and a small pipeline running across Oman from Nahdah to the storage and export terminal at Raz Marqaz on the Arabian coast.  In both cases the scope for increasing capacity is limited. There is no alternative export route for  Natural Gas. Most of the world’s spare capacity in oil production is concentrated in the Gulf States – that is behind the barrier of the Straits and therefore unavailable. Some other producers around the world have increased production by modest amounts.  Canada has promised to increase oil production by 140,000 barrels per day;  Khazahstan by 100,000 – much of which was already planned before the war began.  The largest immediate increases in supply of both oil and natural gas have come from the United States but recent reports say that there are infrastructure limits to the amounts,  particularly of shale gas, which can be produced and exported.   Beyond the Gulf the largest volumes of additional resources are in Russia – but the scope for adding to the current level of supply is limited both by sanctions and by the lack of development over recent years.  At best, and with all sanctions removed, Russia could not provide more than a few hundred thousand extra barrels per day. The NordStream 2 gas line across the Baltic to Germany is still unrepaired after the explosions of September 2022.  The line which in theory could provide some 55 bcm of gas is reported to be partially intact but has yet to certified or permitted to operate.

6.        There is also a shortage of the refining capacity necessary to replace what has been damaged or destroyed.  Over recent years refinery capacity in Europe has declined with many ageing facilities dating back over the last century closed.  By contrast the Gulf states have built a series of large scale world class refineries over the last 15 years.  In addition to the loss of output from the Gulf refineries, the wider problem is being driven by  the mismatch between the existing configuration of the remaining refining capacity in Europe and the mix of products now required.  For instance there is very little readily available capacity capable of producing the volumes of jet fuel which have been lost .  The result has been the development of exceptional pricing for cargoes travelling long distance – for instance from the US to Asia where the jet fuel shortage is for the moment most evident.  The problems in the product markets have been compounded by the decisions of China and India to restrict exports of scarce products from major refineries such as the  Jamnagar complex in India in order to protect domestic supplies.

7.        The shortages being caused by the conflict in the Gulf are not limited to the energy sector.  The Gulf was also the main source of 70 to 80 per cent of Asia’s supply of naphtha for the petrochemical sector.  Major chemical processors in Indonesia, Singapore and Korea have been forced to declare force majeure and to halt production.  Japan has also suffered a break in supplies of methanol from Saudi Arabia while the Zhejiang joint venture between Saudi and China has had to close part of its operations. These closures have a knock on effect across the world because of the importance of petrochemical products throughout the economy. Plastics, packaging, textiles, vehicle production, electronics and pharmaceuticals have all become dependent over recent years on supply chains linked to the dramatic growth in the Asian petrochemical sector.   All these sectors and many more are also vulnerable to price increases.  The world’s largest producer of condoms, the Malaysian firm Karex has announced that it expects to increase prices by 20 to 30 per cent because of the rise in feedstock costs for the plastics and other products on which their business depends.

 8.        The Gulf was also the source of around 30 per cent of the raw materials shipped to the farming industry around the world  including nitrogen based phosphates, urea, ammonia and sulphur – all critical input to global food supply.  The reduction in trade has led to sharp increases in fertiliser prices and fears of  much reduced crop yields especially in areas where higher prices are simply unaffordable.  A series of international organisations including the UNFAO and the World Food programme have warned  that reduced use of fertilisers could translate into significantly smaller harvests in areas such as Africa, South Asia and Latin America and higher prices around the world both this year and next.  Numerous international agencies have warned of a major risk of famine in some areas over the next year.  The continuing  increase in food prices seen around the world for products such as wheat, fruit and vegetables over the last two months is early evidence of the problems to come.

9.         The looming shortage of jet fuel poses a significant challenge for both travellers and the airline industry. Travel to and via the key airport hubs in the Middle East remains severely disrupted.    In April Lufthansa cancelled 20,000 short haul  European flights through the summer.  They and many other  airlines including Air France and BA are beginning to impose surcharges to reflect the increased cost of fuel .  SAS cancelled 1,000 flights in April and both they and Lufthansa are reducing regional flights within Europe. Over the last ten weeks the price of jet fuel in Europe has increased by up to 100 per cent and by more in Asia because of the high transportation costs of bringing in back up  supplies from the US.

10.  For the shipping industry the immediate impact of the closure of the Straits has been a substantial loss of normal trade with hundred of ships trapped by the blockade.  The sector has also had to deal with a sharp increase in war risk insurance premiums and the rise in the cost of fuels. The rerouting of ships  via the Cape of Good Hope typically adds a week to the time involved in deliveries  leading, according to the Chief Executive of Maersk, to an increase in freight rates of between 15 and 20 per cent.  The cessation of normal trade has affected the flow of basic commodities such as iro-ore pellets and other bulk commodities important to manufacturing supply chains and the steel industry.

11.  The crisis serves to remind us all of the extent of dependence of the modern economy on hydrocarbons.  One example of this is CO2 which has become an essential element in a number of key sectors.  For instance ready meals and sealed products such as fruit and salads depend for their shelflife on the use of purified CO2 in the process of packaging.  When speaking to an audience of public sector leaders last week I was reminded by the head of one of the UK’s leading NHS Trusts that medical grade CO2 was essential for anaesthetics and other medical procedures including surgery.  He said that there was a serious concern that a fall in supplies of the gas which is a by-product of specific industrial process would hamper the normal working of the health service.

12.  Many other sectors of the economy – from hospitality to advanced manufacturing and construction -  face a period of rising fuel prices, reduced consumer demand and increased costs of debt. Some will not survive and we can expect a Darwinian process of consolidation in the worst affected sectors.   Individuals also face an increased cost of living and potentially a significant increase in the cost of mortgages and other personal debt. 

13.  The cumulative effect of inflation, lower growth and rising unemployment will also affect public finances especially in countries which are already endebted. France, Italy Belgium and Greece all have debt to GDP ratios of over 100 per cent.  At 93 per cent the UK’s figure is lower but the cost of servicing the debt is significantly higher because the yield on UK gilts at 5 per cent or more is so much greater than in Germany – at 2.7 per cent or France at 3.4.  

 14.  Much of the commentary over the last few weeks has been based on the assumption that the conflict in the Gulf would be strictly time limited and contained by a combination of factors including resistance in the US to a long and drawn out war; a shortage of munitions on both sides and the collapse of the Iranian regime. The expectation has been there would be a stable and enduring ceasefire which would then be followed by a reopening of the Straits and the resumption of normal service.  These expectations explain the wide gap which developed in March and April between the price of oil for future delivery and the substantially lower forward price for 3 or 6 months ahead. In the event the ceasefire has remained fragile and as we approach mid May the Straits are still closed.  The gap has narrowed but the future market prices for the end of the year and into 2027 still look low and will clearly increase if the current ceasefire does not hold.

 15.  The sense of complacency which has enabled stock market valuations to remain high has been compounded by the absence of detailed Government plans for handling the looming shortage of supply and the insecurity created for consumers by rising prices. While Fatih Birol the Executive Director of the International Energy Agency  was declaring several weeks ago that we were entering  “the biggest energy crisis in history” with a loss of supply far greater than in previous oil shocks and saying in mid April that Europe had just six weeks of jet fuel supply left, the official message from the British Government was that there was no shortage of petrol  and that motorists should keep driving as normal. In early May that advice appears to remain in place.  What has changed is that in private  Governments have begun to prepare detailed plans for a deteriorating situation.   In the UK for instance the management of energy security appears to have moved from the Departmental level to the centre of Government with regular meetings of the emergency response process known as COBRA.  Plans for prioritising the delivery of supplies to key sectors such as the food supply chain and the health service are reported to have been agreed but not announced. A complex system to “consolidate” air travel which means concentrating would be passengers on a more limited number of flights has been announced but not yet been implemented.  Nothing has yet been announced on the prioritisation of supplies to businesses or on the question of direct financial support for any category of consumers.  A similar gradualist approach is being taken across the European Union and beyond. In Germany there are plans for targeted schemes to assist vulnerable households and energy intensive firms. Spain has announced a € 5bn fund to support specific groups of consumers and small businesses. In Australia the Government is spending A$10 billion to increase stocks of petrol, diesel and jet fuel to be held in a centrally controlled Fuel Security Reserve. The Government in Canberra is also taking steps to protect it’s trade routes and to shield vulnerable consumers.

These measures, however sensible, do not indicate a real sense of urgency in the public policy response to the immediate challenge posed by events in the Gulf, but the rhetoric of some political leaders indicates a much greater sense of seriousness about the risks.    Friedrich Merz, the German Chancellor has said that parts of the German economy are in “a critical condition” because of high energy costs and warned of the risks of “large-scale, uncontrollable migration” if there is a breakdown of the Iranian state.  The British Prime Minister Kier Starmer has described the war as “a long lasting strategic and economic shock for the UK which will shape our future for a generation”. One can only assume that there is a wave of substantive short term measures to come over the coming weeks.

16.  As spring turns to summer and we pass the end of the beginning it is clear that the impact on consumers will be very different from one country to another. Although rising fuel prices set by international markets will push up bills and inflation, the physical impact of shortages will vary. The level of dependence on imports of both oil and natural gas is over 90  per cent in Germany, France and Italy, with the French position somewhat mitigated by the reliance on nuclear power for most electricity generation.    China on the other hand has built extensive oil stocks and can continue to  rely on coal as main source of power generation and industrial energy use, including in the petrochemical sector. China also has a growing mix of sources of low carbon power generation from wind, solar and nuclear.  The US is self sufficient in oil and gas removing any fear of shortage.  For Americans the key issue, as so often before is the high price of gasoline.  Even at 4 to 5 dollars per gallon – the average in the US in early May, however,  the gasoline price is still more than 40 per cent lower than the price in the UK or Germany.  Inflation aside, with increased military spending the war is undoubtedly good for the American economy. Among the developed countries the UK, Germany and Japan seem likely to be the most seriously affected.

17.  The hardest impact will undoubtedly be felt by the world’s poorer countries which typically are dependent on imports and do not have the resources to pay the increased prices. Bangladesh for example which imports  95 per cent of its energy requirements, mostly from the Gulf, has suffered not just from inflation in fuel and food prices but also from a loss of earnings. Exports of clothing depended on trade through the Red Sea have seen a damaging increase in shipping costs while remittances from the estimated 3 to 5 million Bangladeshi citizens employed in the Gulf countries have fallen sharply.

These of the facts of the current situation. What happens next remains unknown. Over the next few weeks we will see in more detail the impact of what has happened since the war began on February 28th. The success or otherwise of mediation will determine whether trade through the Straits of Hormuz is restored or remains constrained.  The post ceasefire negotiations – in particular on the future of Iran’s nuclear ambitions – will take longer and their progress will determine the extent to which the Gulf remains a war zone, with continuing physical risks to commercial trade.  By the autumn we should know whether the war will produce no more than a temporary if uncomfortable economic downturn as stock markets seem to be assuming or a serious global recession.

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In a future post I will discuss the longer term consequences of the conflict.  The first and most obvious conclusion is that the status quo ante will not be restored.  US and Israeli action against Iran has opened up new fissures in the  Middle East. This will not be the last war in the region.  Governments and energy dependent businesses across the world must adapt to a situation in which supplies from the Gulf  cannot be guaranteed or taken for granted.  In the energy sector there is much talk of a surge in the development of renewables and nuclear to achieve something fancifully called “energy independence” but the unavoidable present reality of reliance on oil and gas for at least three quarters of daily energy use which will take decades to eliminate.  Perhaps the most important consequence of all will be the realisation that open market globalisation – the main economic trend of the last 30 years – cannot provide the security of supply on which modern economies have come to rely. 

Over recent months the new management of BP has been undertaking a full scale strategic review. The company has underperformed over the last two decades and has pursued an unsuccessful strategy of combining the development of oil and gas supplies – their core expertise – with experimental investments in low carbon activity.  Among many other questions for the review, one issue back on the agenda is that of location and identity.  Should BP remain a “British” company headquartered in London or move elsewhere – perhaps to New York or Singapore?  The debate is not new of course.  In the past the conclusion of such discussions has always been that while the commercial logic supports relocation  sentiment and a concern that the UK Government would try to block any move have kept BP in London.  Now, however, the balance of the discussion has been shifted by the hostility of the UK Government to the oil and gas industry and over the last week to BP itself.

BP’s history in Britain goes back to the creation of the Anglo-Persian oil company in 1908 and to a rescue by Winston Churchill, then First Lord of the Admiralty, on the eve of the First World War. Churchill believed that the British Navy would require oil instead of coal to fuel it’s ships. The oil which Anglo Persian had found at Masjed Soleiman had to be protected as a strategic national asset. A Government investment of £ 2.2 million bought 51 per cent of the company.

Since then the company has at different times been an agent of British policy – in Iraq in the 1920s, in Iran through the fall of the Mossadegh regime in the 1950s, and even more recently in the former Soviet Union.  I have a vivid memory of attending a meeting with Prime Minister Tony Blair soon after his election in 1997 at which he actively encouraged BP to invest in Russia as part of his attempt to build a warm relationship with the new post Soviet administration in Moscow.

For most of the last century BP was inseparable from the British Government.  The  company was run as a commercial enterprise but with two government directors on the board. Corporate and Government policies were closely aligned.   The expertise of the oil and gas industry which made possible the development of the North Sea was seen as a key element of Britain’s competitive advantage in the world.   BP’s advertising slogan – Britain at it’s Best – was matched by real achievements. For many years the company was the first choice of employer among new graduates.

But times change. The British Empire has ceased to exist and the closeness of the company to the UK Government has waned.  The last Government appointed directors left the BP Board in 1987 as privatisation ended the Government’s shareholding.  Since then most of the company’s shares have been held by investors outside the UK. The word “British” was dropped from the company’s formal name in 2001.

The shift away from the UK has also been reflected in the company’s business activity. Involvement in the North Sea has declined as the province has matured and major fields such as Forties and Magnus have run down.  The company retains a limited portfolio of activity in Britain including investment in net zero projects in Teeside and Aberdeen. In total, however, these amount to less than 20 per cent of BP’s worldwide activity. As the company focused on reducing it’s debts and improving the quality of it’s portfolio under the leadership of Albert Manifold, the new Chairman and Meg O’Neill the new Chief Executive that percentage could well decline further.  The opportunities for finding new oil and gas resources lie in places such as Brazil and Namibia where BP has recently made major discoveries.

History and sentiment may have kept the headquarters of BP in Britain but the case for relocation is now strong.

Major international oil companies enjoy significantly higher valuations  in the US. The price earnings ratio for BP shares has remain below that of US companies such as Exxon and Chevron.

Even more important for the future is that the geographic shape of the energy market has changed dramatically, with most of the growth in oil and gas consumption coming in Asia driven by population growth and the spread of prosperity in countries such as China and India.   On the estimates of the International Energy Agency well over half of  of the growth in worldwide energy demand over the next 25 years will come from the Asia Pacific region while demand in Europe and North America declines.

To thrive companies must adapt to the world in which they live.  As history has shown no one owes them a living, however large or powerful they might once have been.  Older readers will remember once great companies such as ICI and British Leyland.  Given the changing shape of the global energy market it is hard to identify any commercial or strategic argument which would push BP to remain headquartered in the UK.  The decisive factor in the current debate may therefore be the deteriorating relationship with the UK Government which has shifted (on the Government side) from one of mutual dependence and respect to something closer to hostility.

Last week the UK’s Secretary of State for Energy Security and Net Zero tweeted in response to  BP’s strong first quarter profits that “profiteering from a crisis is morally and economically wrong”.  He did not mention the amount of tax the company pays in UK or the number of jobs created in the UK not just in the oil and gas sector but also in the development of low carbon activities.  He did not mention the company’s role in helping to secure the UK’s energy supplies in the current complex international environment.  The tweet was then taken down but the statement linking BP to the allegation of profiteering from the current crisis has not been challenged by number 10 or by any other Government Minister. One has to assume that the comment reflects the view of the Government as a whole.

If BP or any other company, in any sector, has been illegally exploiting the current energy crisis they should be prosecuted.  The fact that no evidence has been presented to back up the accusation is telling but the hostility remains and reflects the shift of attitude not just towards BP but to the oil and gas sector as a whole.  Equinor the Norwegian state company has for instance been accused of “corporate vandalism” for seeking to develop the Rosebank field in the North Sea. The industry has become accustomed to unpopularity but the latest unsubstantiated criticism of a major company from a senior Government Minister is unprecedented.

In the past Governments of any colour would have used every possible means to discourage BP from leaving the UK. Presumably the UK Government would now be indifferent at best. BP is not the power in the world which it once was, but then nor is the United Kingdom. The quality of BP’s own commercial decisions will determine whether the business thrives or fails.   The company does not need the British Government behind it.  Indeed the roles are reversed.  The UK Government needs to ensure that London remains a natural home for major international companies.  Using exceptional powers to block any proposed relocation would deter potential investors who prefer free and open markets. BP’s departure would signal to the world that Britain is not a great place to do business or from which to do business. That is why the Government’s hostility to a company which has been and should be a major national asset is an act of self harm.

The complacency being shown by the UK Government towards the looming prospect of a global energy crisis raises unhappy echoes of the casual attitude to the spread of Covid in the early weeks of 2020.  Even if the latest talk of negotiations between the US and Iran leads to a ceasefire there will be physical shortages and price rises for energy consumers over the next few months because of the break in the regular flow of tankers through the Straits of Hormuz.    Whether the war continues or not energy security is back on the agenda.

The Gulf War of 2026 has cruelly exposed the UK’s energy insecurity.  Complacency fed by half a century of reliance on North Sea oil and gas and then by the apparently smooth operation of global energy markets had led to neglect of the key question – what happens when something goes wrong.  Over the last few weeks this complacency has been compounded by a belief that the war would be short and sharp and that Iran would not have the will or the technical ability to resist.  

Global energy markets are effective but they are vulnerable, because supplies come from a limited number of areas many of which are in different ways politically insecure.  Saddam attacks Kuwait; the Russians invade Ukraine; the US and Israel go to war with Iran. No one can predict such events or the detailed consequences but the likelihood of disruption is always high and should be part of normal contingency planning.   The fact that four weeks into the war the UK Government is convening the emergency planning process of COBRA  shows that such planning has not been done.  That is a mark of failure which confirms that there is a strong case for moving energy security, if not the whole energy agenda, back into the centre of Government.

Britain and Europe may be trying to keep their distance from the military action but they cannot be immune to the consequences.  The European Union has long been dependent on imports which now account for over 90 per cent of demand for both oil and natural gas.  The UK has not been self sufficient in oil and gas for more than 20 years and now imports over 60 per cent of daily oil and gas consumption. The UK’s dependence will grow sharply in the next few years as the North Sea declines and as the existing nuclear power stations reach the end of their useful lives.

Renewables – wind and solar - provided just over 35% of Britain’s  electricity in 2025 but electric power should not be confused with total energy use and the economy as a whole is now and will for the foreseeable future remain dependent on oil and gas for the majority of daily energy needs.

When supplies of oil and gas  are threatened we have a problem but the problem becomes a crisis when there is no contingency plan.  

The question is what should be done now and for the future to enhance genuine security of supply.   There is no magic bullet but a series of rational steps are needed to mitigate any shortage  and to protect the economy and individual consumers as much as possible.

Four steps could be taken immediately

The first is to maximise the production of our own resources, particularly in the North Sea.  On the best estimates of the North Sea Transition Authority there are some 3 to 4 bn boe of proven reserves of oil and gas yet to be produced and more than another 10 bn boe of potential resources.

Experience suggests that the price increases of the last few weeks provide an incentive to the energy industry to develop known resources and to find more – not least by increasing recovery factors. The energy profits levy should be redesigned to encourage a new surge of activity in the North Sea – something which will in time produce more revenue as well as jobs through a revitalised supply chain.  The wave of unemployment around the industry especially in Scotland should be halted and reversed.

Secondly the level of stocks, especially of natural gas, should be expanded from the current level of around 13 days of demand to at least 50 days and perhaps 100 – bringing the UK into line with France and Germany.   The stocks should then be maintained at that level should not be run down but kept as a cushion to reassure nervous consumers.  The reduction in gas stocks in recent weeks to as little as 1.5 to 3 days of supply at the beginning of March has been a foolish act of policy which demonstrates how little the Government understands about the complexity and importance of the energy sector.

Thirdly the Government should secure solid long term contracts to cover as much of our import requirements as possible.  Some such contracts are already in place – for instance with Norway but the contracts with Qatar may just have been broken because force majeure has been declared by the Qatari Government following the Iranian attack on the Ras Laffen export  facility.

Fourthly the Government should focus on the demand side of the equation and incentivise both energy efficiency and electrification. Both have been neglected.  We waste as much as half of the energy produced in Britain for instance through transmission losses and the unused heat being produced   according to official Government figures.    (https://flowcharts.llnl.gov/)

Reducing the waste by just 10 per cent would be a significant positive contribution to rebalancing our energy budget.  Electrification is clearly the obvious way to reduce the amount of oil and gas imports required – limiting dependence and in the process reducing emissions.  Why for instance is only 50 per cent of the rail network electrified ?   The strongest incentive for the use of electricity would be the adjustment of the energy price cap, which is driven exclusively by the European wholesale price of natural gas, onto a new and more rational formula which reflects the more stable costs of producing wind and solar power.

Implementation of these steps will help but although necessary they are not sufficient to deal with the current situation.   As things stand UK consumers will have face a 20 % increase in the price cap for electricity to around £ 1,970 in July  according to the authoritative estimate provided by Cornwall Insights ( https://www.cornwall-insight.com/predictions-and-insights-into-the-default-tariff-cap/ ) with another increase to follow in  October.    That level of prices will be higher still  if the war continues, if the Straits of Hormuz remain effectively closed and if more energy infrastructure such as refineries, liquefied gas facilities and pipelines around the Gulf is damaged or destroyed.  The new higher prices will remain in place until a full ceasefire is in place and for a long time beyond that if key facilities have been damaged. Businesses, which are not subject to any price capping mechanism, will also face sharp cost increases and potentially a shortfall in supply.

The UK and European governments have to plan against a reasonable worst case scenario – a sharp price rise to something above today’s levels and a physical shortage of supplies as the importing countries of the world compete for shares of a smaller volume of production. In those circumstances some countries will be able to pay whatever is asked, others will try to substitute other fuels such as coal; some – inevitably the poorest - will be forced to subsist on lower volumes of energy supply.

In Britain and Europe the plans should protect the most vulnerable and the critical  elements of the economy and wider society.  The choices involved must be explained transparently to secure public support and to avoid the risks of panic buying which in the absence of a credible plan are all too real.

All the steps proposed above should be pursued whether or not a ceasefire is declared this week.  This is very unlikely to be the last war in the Middle East or to be the last disruption of supplies on which we have become dangerously dependent.

Energy supply, although often taken for granted, is absolutely fundamental to the operation of a complex modern economy. Governments across Europe will be judged by how they manage the coming crisis.  Because of the lags in the system – in particular the period of weeks between tankers leaving the Gulf and reaching consumers – we are still in a phoney war period.  But the normal flow of tanker traffic has now  been almost totally halted for more than two weeks. 

There is as yet no physical shortage of oil or gas but the days and weeks are passing.   The current attempt to talk down the risks, perhaps mistakenly driven by a desire to avoid panic, is dangerously reminiscent of the early weeks of 2020 when the Covid was dismissed as a distant and minor problem.  Every crisis is different but complacency is never the right answer.

The attacks by the US and Israel have begun to focus on Iran’s internal energy supply network.  Fuel shortage facilities are in flames. Both the Iranian military and the wider economy are overwhelmingly dependent on oil and the aim is clearly to force the breakdown of economic activity.  Conversely Iranian attacks are targeting energy infrastructure across the Gulf States from Kuwait to Bahrain to Saudi Arabia adding to the pressures on the market already being caused by the effective closure of the Straits of Hormuz.  The aim for the Iranians is to raise the cost of the war for the US and it’s allies.

A week ago many observers including traders in the world’s stock markets assumed that the war would be short and sharp and would end with a transition to new leadership in Tehran ready to negotiate a deal with the Americans on Mr Trump’s terms. But Iran is not Venezuela and the US does not have a collaborator to match Mrs Delcy Rodriquez  in Caracas.

The appointment of Mojtaba Khamenei as the new Supreme Leader is a blatant assertion of resistance by Iran and the attacks on other Gulf States is clearly a deliberate strategy to add to pressure on the US by creating market instability and frightening the rulers of countries such as the UAE.  The ambition to make Dubai the centre of the global economy is already in jeopardy – bankers and tourists do not like air raid sirons and burning hotels.

The assumption that supplies of weaponry would run out also begins to look mistaken. The attacks on Gulf assets including the Al-Ma’ameer  refinery in Bahrain  and the Ras Tanura refinery in Saudi Arabia along with the threat to destroy any tanker which dares to pass through Hormuz have not required sophisticated military equipment. Drones are the new weapons of asymetrical warfare.

The Iranian strategy has also been helped, unintentionally of course, by the risk aversion of the insurance market, particular the Protection and Indemnity insurance groups in London. That aversion arises, as explained in an excellent post on Substack from Crack the Market  from the European Insolvency II rules which require insurance providers to be fully capitalised against potential risks.  In the midst of war those risks and therefore the capital required are almost unquantifiable.  (crackthemarket@substack.com)

Mr Trump has talked about provide guarantees but no details have been published and the insurance providers do not trust his ability to deliver.

The result is the prospect of a longer war with sustained resistance from the Revolutionary guards and other units in Iran backed by a new Supreme Leader. The hapless and powerless President of Iran Masoud Pezeshkian has apologised for the attacks on other Gulf States and has said they will stop but those controlling the weapons have ignored him.  Numerous targets across the Gulf have been attacked over the weekend.

President Trump can hardly claim victory with Mr Khamenei Jnr taking power in Tehran.  A new and younger generation of Ayatollahs does not constitute regime change.  Mr Trump may tell Kier Starmer that the war is “already won” and that no additional help is needed but the reality is that the conflict continues.

The impact of the war on the global economy which was assumed a week ago to be minimal and temporary is also now beginning to look more serious. The initial rise in oil prices was tempered by the belief that spare capacity was plentiful. Last week the International Energy Agency assured us that there was “ plenty of oil in the market”

The IEA’s latest statements combined with the emergency meeting of the G7 finance ministers, however, suggests a change of tone,  If Hormuz remains closed for any length of time production of oil and gas will be halted because storage capacity is limited.  Kuwait has already announced a throttling down of production because of a lack of storage capacity.  Qatar has halted production of LNG and delayed planned expansion of export capacity .    The much quoted surplus of supply which is supposed to be available is valueless if most of the oil and gas in question is stranded on the wrong side of Hormuz.

Also mistaken was the view held by many (myself included ) that closing the Straits would be an act of self harm by the Iranians who need exports to maintain the crucial flow of revenue. The current Iranian actions may lack economic logic but we should not apply Western standards to the Islamic Revolution.

Higher oil and gas prices will cause inflation and unemployment in countries dependent on imports from Japan and South East Asia to Britain and most of continental Europe. Key sectors of the global economy such as food supply will also be affected because the commodities which support fertiliser production also flow through the Persian Gulf and are already suffering from the trade disruption which the war has created.    The Gulf States will lose short term revenue at a moment when increased defence spending is needed.  Some could be forced to liquidate assets held in the West, as could the numerous businesses and financial institutions which depend on flows of revenue originating in the oil and gas sector.  Interest rates are also likely to rise adding to the problems of those already carry heavy debts.

European countries including the UK can distance themselves from US and Israeli military action but there will no escaping the consequences of higher energy prices. Europe is 95 to 98 % dependent on imported oil and 90 per cent dependent on imported gas.  If the situation worsens individual countries will find themselves competing  against each other (and of course against other importers such as China and Japan) for whatever supplies are available.

As prices rise there will be inevitably be demands for subsidies to domestic and business consumers in Britain and across Europe as occurred after the Russian invasion of Ukraine.  Few countries are in a good position to meet those demands given existing debt levels and the lack of economic growth.

The initial response to the war has been one of complacency.  The UK Chancellor managed to report on the state of the economy last week without mentioning the risks which the war poses. The events of the last few days have shown that things will not be back to normal as Easter. The serious consequences are just beginning to be felt. The risks of a sustained rise in commodity prices looks likely to trigger a serious downturn in economies which are already fragile.

Events in Iran, including attacks on shipping in the Straits of Hormuz and the resulting sharp increase in the oil price,  which is now (at $ 78 per barrel for Brent crude ) 24 per cent higher than it was at the beginning of the year, are a sharp reminder of the UK’s growing dependence on imported oil and gas.

The facts are simple. Oil and natural gas provide over 70 cent of the UK’s daily energy consumption.  Renewables Solar and wind) are growing but still provide only 13 per cent of the total.  Nuclear delivers 7- 8 per cent but that figure will decline as old plants are closed.  The new nuclear reactors at Hinkley, once due to be operational by 2017, have just been delayed again (for the fifth time) and will not now be commissioned before 2031 at the earliest.

The energy transition has begun but at the moment is limited to a partial shift in the production of electricity.  The rest of the many ways in which we consume energy are largely unchanged. 96 per cent of cars and light vehicles still run on petrol or diesel oil.  Half the railway network uses oil.  So do most  manufacturing industries , freight lorries, airlines and home heating systems.  Gas remains the essential back up for power generation when the wind is not blowing.

Transforming a system embedded in our homes, vehicles, offices and factories involves high up-front capital costs which are becoming evident.  The idea that the transition was cost free was always false.    The costs are increasingly visible and as recent research has shown that is reducing public support for the net zero  agenda. (https://www.kcl.ac.uk/news/uks-sense-of-urgency-on-net-zero-and-support-for-climate-policies-falls-sharply-study-finds)

On the other side of the equation supplies of oil and gas from the UK continental shelf are falling year by year. Production peaked at the turn of the century but by last year had fallen to a fifth of that level for oil, and less than a third for natural gas.  The fall has been gradual but could now accelerate because of UK Government policy which states that no new licences will be granted for on or offshore fields.

No new exploration activity took place last year, a decision on the development of the  Rosebank bank is still pending, and a number of companies have already given up and redirected their investment elsewhere because of the Government clear desire to see an end to production as part of it’s net zero strategy.

With demand still strong and local supplies falling, the unavoidable consequence is rising imports.  At the moment the UK imports 60 per cent of it’s oil needs, and 60 to 65 per cent of natural gas consumption.  Both numbers are likely to increase substantially over the next five years.

Import costs are set by global markets which have been destabilised this year first by the prospect of war and now by the US and Israel attacks followed by Iran’s retaliation against others in the region who have allowed the US military to operate from their territory.

Iran produces some 3 to 4 million barrels of oil a day and despite sanctions has been a significant supplier to the global market in recent years. Even more important is the fact that Iran controls access for shipping through the Straits of Hormuz which accounts for 20 per cent of the world’s daily oil consumption and more than 20 per cent of global gas trade.

Since the conflict began on February 27th several ships have been attacked, and the Iranians have warned shipping not to attempt to pass through the Straits.  Dozens of tankers are stranded as a result and vulnerable to deliberate or accidental damage in a war which at the moment is dominated by missile and drone strikes.

Closing the Straits would be an act of self harm by the Iranians given that their exports also have to pass through Hormuz but attacks on tankers identified with countries in the region which have supported the American action could represent a desperate act of revenge by a regime in Tehran which is facing defeat.

Even if Iran does not close the Straits there is already evidence that insurers are becoming reluctant to provide cover to ships wanting to pass through what could justifiably be described as a war zone.

Most of the oil and gas tankers passing through Hormuz turn East to supply the growing centres of demand in Asia including India and China.  They will be the first victims of any shortage of supplies but oil markets are global and any increase in prices as different importing countries bid for supplies will be felt across the world.

Although there is some spare capacity of both oil and gas in different producing countries even the full use of those supplies would be insufficient to offset the impact of the closure of Hormuz.  So would the extra 200,000 b/d of production promised by OPEC. In any case much of the spare capacity lies in countries which are themselves reliant on ships passing through Hormuz.

Oil and gas prices have spiked and could stay high if the conflict continues and causes lasting damage to production facilities or important infrastructure.

..

How would all this affect the UK ? The cost of imports will rise in line with the global markets. Last year imports of oil and gas cost some $50 bn. 

Any increases would be passed onto consumers unless the Government chose to subsidise the costs involved – a very difficult choice for the Chancellor to make given the state of the public finances.  The increase will add to inflation and further constrain growth.

There is also the question of the physical availability of supplies.

The UK currently relies on Norway for the bulk of it’s gas imports which is also the main supplier of imported oil.   Norway is a secure and reliable supplier but lacks the immediately available spare capacity to meet additional demand caused by the loss of oil and gas from the Middle East.    If the global market remains tight there will be intense competition from Asia and from continental Europe for any available supplies.   Norwegian production is close to it’s maximum short term capacity.  Since the war in Ukraine began 4 years ago Norway has been a crucial source of supply for the countries of the European Union but it cannot now be taken for granted as the supplier of last resort for everyone.

These are facts of the current situation and the context for a decision on whether to proceed with the deliberate run down of production from the North Sea. The volumes available from the North Sea are limited and clearly insufficient to offset in full the need for imports. But remaining proven and commercially recoverable reserves are estimated to amount to 2.3 bn bbl of oil and 0.6 bn boe of natural gas. In addition on the figures produced by the North Sea Oil and Gas Transition authority there are some 10.8 bn boe of contingent resources – oil and gas believed to be in place but not yet proven.

In environmental terms the choice might be expected to be the retention of the current policy – although that choice is complicated by the fact that imports of natural gas in the form of LNG are several times more carbon intensive because of the processing involved. On economic and security grounds, however, the answer is simple – it cannot make sense to abandon the North Sea earlier than is absolutely necessary and to allow the UK to become totally reliant on volatile international markets over which we have no control. 

The complacency of the Government’s most recent statement on energy security which does not mention the possibility of war in the Middle East or spikes in price shows the extent to which a change in priorities is urgently needed. (https://www.gov.uk/government/publications/statutory-security-of-supply-report-2025)

The massing of a US military force around Iran has been the primary cause of the 10 per cent rise in the oil price since the beginning of February. Oil traders have no more knowledge of President Trump’s intentions than I do but they anticipate disruption, perhaps to the flow of oil through the Straits of Hormuz, perhaps through retaliation by the Iranians against US allies in the region. They are right to be nervous about the short-term risks but the international industry and serious investors will be focused on the longer-term implications of US intervention.

Almost 50 years since the sequence of events which led to the overthrow of the Shah, the Islamic Republic appears to be coming to the end of it’s turbulent life. The authority of the theocracy initiated by Ayatollah Khomeini and led now by the 86 year old Ayatollah Khamenei is falling away. The economy is broken, with Weimar style inflation. As in Venezuela a corrupt military including the Islamic Revolutionary Guard Corps is clinging to power but fear alone is not proving a sufficient deterrent to the overwhelming demand for change. Brave protestors are challenging the regime on the streets despite vicious repression.  More and more women are ignoring the dress codes imposed by the Mullahs.

The regime is now too scared to allow the public to use the internet and the religious leadership is effectively in hiding.  Events in Tehran and across the country are a reminder that Iran even with the Ayatollahs in charge has managed to remain an open society. Half of the Iran’s 92 million people are under the age of 35 and as anyone who has been in Iran in recent years will confirm they show no great sign of wanting to live in a country run by octogenarian clerics.

What would change - forced by the threat or perhaps by the hard reality of American armed force – mean for the oil market ?

The starting point is the Iranian oil industry which has recovered remarkably over the last 5 years. Production has risen by around 50 per cent from the low point of 2021. Precise production figures cannot be independently verified but sit somewhere between 3.2 and 4 million barrels per day if condensates and other liquids are included. That is despite sanctions and without any substantial foreign investment in new technology. Revenue from the sale of that oil – mostly to China and other countries in Asia – is low because of the discounts required to secure sales on the grey market but is still by far the largest source of income for the Government in Tehran.  Effective mechanisms to disguise the origins of the crude in the UAE and Malaysia mean that trade volumes have been maintained. This is very different to the situation in Venezuela where decades of neglect, underinvestment and the corrupt diversion of revenues have steadily reduced production capacity. Venezuela has lost many of the highly skilled technicians who made the state-owned oil company PDVSA an internationally respected business. Those technicians now work in the US and elsewhere and show no desire to return a country which is still run by Chavistas. In Iran by contrast the main pillars of the professional industry remain in place and have been allowed to operate effectively. Sanctions have limited access to key technologies such as the enhanced recovery techniques necessary to maintain output in the older fields but as the production figures suggest the overall resilience of the industry has been remarkable.

There has been no recent independent assessment of the technical state of the industry in Iran but it is clear that the older, larger fields such as Ahvaz and Marun are in decline.  New fields are being developed –  including the giant Azadegan field and the Yadavaran field which is shared with Iraq. For the moment, however new developments are unlikely to be able to do more than maintain current levels of production as long as sanctions remain in place. The best estimates suggest that if sanctions were removed Iran could add a few hundred thousand barrels per day to current production levels over a period of 12 to 18 months.

Recent market concern has focused on the notion that an open conflict could cut off substantial supplies of oil to the international market from Iran and from its neighbours.   

The war could in theory disrupt output temporarily, but the Iranian regime is unlikely to want to close the Straits of Hormuz given the importance of getting its own exports to market. Attacks on other producers around the Gulf also seem unlikely because the consequences would automatically strengthen the American led coalition against Tehran. Any disruption would need to be huge in scale and sustained for a long period to make any material difference in a global oil market which is currently very fully supplied.

On the US side, President Trump who repeatedly stresses his desire to see lower oil and gas prices for American consumers is unlikely to attack the Iranian oil fields or the export terminals. The more likely targets are the communications infrastructure, the bases of IRGC and above all any remaining nuclear sites which the Americans have been able to identify. A quick victory particularly on the nuclear agenda seems from the available evidence to be Mr Trump’s desired outcome. Sanctions would then presumably be lifted gradually in return for adherence to the nuclear deal. The idea that there is an emerging Trump doctrine of international relations will provoke mocking laughter among many readers but there is certainly a case for saying that he believes in the combination of using military threats and limited targeted action as sticks balanced against economic carrots as the keys to success.

The most likely outcome in Iran therefore is not regime change – never an attractive prospect for Washington – but a change of policy under a cloak of continuity.

On this basis the oil market will be little changed in the short term. Iranian oil exports are unlikely to be cut off and equally unlikely to be dramatically increased in scale in the short to medium term.

More interesting to the industry is the prospect that the regime in Tehran will, in the interests of its own survival, refocus on the economic agenda. That could lead to a reopening of the country to international investment starting with the oil and gas sector. Large areas of the country remain to be explored using current Western technology. 

The life of existing oil fields could be extended but even more important and consequential would be a serious expansion of the natural gas business.  In addition to further development of South Pars – the world’s largest gas field which is shared with Qatar, Iran holds some 1,200 trillion cubic feet of undeveloped natural gas both on and offshore. That level of reserves is on a scale matched only by Qatar and Russia. For the moment most of the gas produced goes to the domestic market but a major expansion would be led by export growth. Geographically Iran is ideally placed to become the natural supplier of both oil and gas to India and to the expanding economies of Asia.

There could in short be something of a gold rush – a view supported by the number of energy companies already watching Iran and building links where they can from offices in the Gulf and Amman.

Change will not be instant and could involve resistance from those among the current leadership in Iran who would be liable to lose out. Iran, however, is historically a trading nation and it is reasonable to expect that international engagement will be far more welcome in Tehran and than was the case in Baghdad in 2003.

There is one more dimension which President Trump has perhaps not taken into account. If Iranian gas were developed in substantial quantities – something which could be done relatively quickly - the global gas market would be severely disrupted. Gas demand is growing but there are clearly more potential suppliers than customers. Iranian gas because of the volumes involved would be relatively low cost and the links by pipelines or LNG facilities to markets such as India could easily be put in place.

The most likely response to oversupply would be the shutting in of some of the US production and export capacity which has grown rapidly over the last few years as the latest phase in the US shale revolution. This year alone seven major new LNG export facilities with a combined capacity of over 10 bcf/day are due to come into operation in Texas and Louisiana. Over the last decade US gas exports have risen from zero to some 13.7 bcf/day in 2025 and on some predictions could rise to 26 bcf by 2030.

Events in Iran, and even possibly in Russia – another gas producer which would be delighted to restore its trade with Europe in the event of a settlement in Ukraine could pose a direct threat to those exports. With the US gas market more than fully supplied any constraint in export growth would damage the shale industry as a whole. The shale sector is highly price sensitive and, in many cases, production can be temporarily shut in if the short-term economics do not work.

The US is more than self sufficient in energy - which means that exports and therefore the volumes of production required are vulnerable to changes in the global market. Mr Trump knows the property business – he may now be about to get a lesson in how the energy industry works.

With a nice touch of irony it turned out to be the leaders of America’s major oil companies – the Chief Executives of companies such as Exxon and Chevron who spoke truth to power in their meeting with President Trump in the White House on Friday. 

Them told Mr Trump no doubt in exquisitely lawyered terms, that they were not about to invest “at least $100 billion dollars” in Venezuela as he had demanded.

In the words of Darren Woods the head of Exxon, as reported in the New York Times  “ We’ve had our assets seized there twice, and so you can imagine that to re-enter a third time would require some pretty significant changes. Today it is uninvestable.”   Mr Trump has made clear that the money would come from the companies and not from the US Government but acknowledged that the companies would need security guarantees – a promise regarded as having no meaning unless there are to be large numbers of US troops on the ground.

Of course the companies would like to see the return of the assets which were nationalised by the Venezuelans in 1976.   But restitution must be achieved through legal process.   Mr Trump did not help his cause by dismissing the idea of recouping the money.  “ We are not going to look at what people lost in the past because that was their fault” he said.

Of course the companies would like to be back in Venezuela exploring for and then producing oil and gas.  But they will not go back until they are welcomed back by the Venezuelans themselves under terms which see the proceeds of reconstruction shared on mutually acceptable terms.   That is not a judgment of high morality but arises from a pragmatic and accurate view that the huge investments required can only be worthwhile if they are sustainable over a decades long lifetime.  It is hard to see that happening without a full scale democratic regime change in Venezuela.

Of course they preferred to see Donald Trump elected in 2024 but that does not mean that they believe what he says or support policies which lack detailed substance beyond a tweet on Truth Social.  In the exclusive Petroleum Club of Houston – a private Club which serves as the meeting place of the industry - the words most commonly applied to Mr Trump are “stupid” and “dangerous”.  Egotism and self promotion are not regarded as positive attributes in the industry board rooms.  As one oil executive said to me during Mr Trump’s first term “real men don’t tweet”.

The companies have not gone woke or picked up a dose of left wing ideology. They are as they have been for a hundred years and more - fundamentally committed to conservative values.  The problem is that those values do not match those of Mr Trump. 

-              For the companies the rule of law is paramount. That is the basis of their claims on Venezuela and of all the business they do around the world. They have no desire and no need to invest in failed states or in areas where corruption is so rampant that it becomes a substantial business cost. They did not expect an American Government to treat the law as a matter of discretionary choice.

-              The companies are solidly based in America but completely internationalist in terms of their operations.  Random tariffs are in their view irrational and they have no wish to be caught up in the inevitable conflicts which tariffs are creating between the US and its trading partners.  As major beneficiaries of globalisation they do not want to see America despised in basically friendly countries such as Canada, Greenland and most of the European Union – none of which pose any threat to the USA. Equally they do not appreciate President Trump’s  obsession with China – a country which is close to being equal in economic weight with the United States and which imported more than 11 million barrels of oil last year. The US energy industry would like to do more business with China rather than less.

-              Of course the US must defend itself, and should expect its allies to pay their fair share for that defence.  But if “America First” comes to mean “America Alone” that poses an added risk for companies operating around the world.  If the post war order is to be replaced by a return to nineteenth century style spheres of influence the companies fear they will find themselves trapped in one single sphere and excluded from the others. 

-              Even on climate change the attitude of the companies is more sceptical of the US’s Government negative stance than many European observers might imagine.  For them the climate is an issue to be managed rather than denied. The major companies believe that oil and gas has a very long future but accept that over time there will be an energy transition. Wind and solar will supply a gradually increasing share of electricity demand but beyond that there is as yet no clear transformative technology in place.   When genuinely commercial solutions emerge the companies will use their vast resources to buy up the technology and to deploy it using their global market reach. In short they will take second mover advantage.  President Trump’s arbitrary block on scientific research and his petty approach to wind projects which pose no real threat to oil and gas are seen as the actions of an old man who does not look far ahead.

-              From long experience the companies distrust populism.  Unlike the tech bros who have picked up easy money without the need to learn the complexities and trade offs of the world the energy companies have lived (and survived) through wars, revolutions, expropriations and multiple corporate mistakes.  They had hoped for a business friendly Government but find themselves instead with a Government friendly only to its own family business.  Many fear that one form of populism can only lead to another with a resurgence of the ideological left.

All this of course is unspoken, which is why the blunt negative and very public response to the President’s demands in relation to Venezuela is so important.  Without the companies President Trump cannot take over the Venezuelan oil industry. Venezuela will remain under the control of Maduro’s government minus only Maduro.

Over the last year the tone of bullying dominance from Washington has overwhelmed the weak and pushed many others to make accommodations in the hope of staying below the firing line.  But as the last week has shown those with real power respond to attempted bullying by staying where they are and simply saying no.

The major American oil companies – Exxon, Chevron and Conoco Phillips - have been pushed to the front of the stage by President Trump over the last two days. On Saturday, just hours after the coup in Caracas he announced that “ We’re going to have our very large United States oil companies, the biggest anywhere in the world, go in, spend billions of dollars, fix the badly broken infrastructure and start making money for the country.” This is not likely to match the companies own view of their role.

The American assault on Venezuela will have come as no surprise – the companies’ networks within the US Government are extensive and the US military is one of their major customers. The known unknown for the companies is what happens next.

The international oil industry has a long history in Venezuela dating back to 1922 when oil was discovered at Lake Maracaibo by Royal Dutch Shell leading to a joint development with Standard Oil of New Jersey and it’s local subsidiary Creole – entities which later became Exxon. The companies saw their assets nationalised in 1976 but retained trading relationships not least with the state company PDVSA until the Chavez Government in Caracas took direct control of what had been a highly professional and respected business. Only Chevron has retained a small and minor interest under highly restrictive exemption from US sanctions.

Returning to Venezuela has long been an aspiration for the oil industry because of the extensive reserves, running to over 300 bn bbl of oil, which remain to be developed. Until now any return has been no more than a distant possibility. President Trump in his statement on January 2nd said that regaining the assets stolen from the companies (and therefore in his view stolen from the United States) through nationalisation was a primary objective of the intervention – an assertion not repeated in any statement from the companies themselves.

The companies know President Trump and undoubtedly prefer his support for the oil industry to the ambivalence of his predecessors and opponents but will not appreciate his attempt to co-opt them as enforcers of an ill defined policy under which “America will run Venezuela”

The immediate response will be extremely cautious. Any corporate involvement will be dependent on the clarity of governance in Caracas. President Trump’s stated policy is to establish a new legitimate Government but that will take time and for the oil companies and many other potential investors what matters is who is charge now. President Trump created confusion by suggesting that President Maduro’s Vice President Delcy Rodriguez was “presumably now in charge… and would hold power in Venezuela as long as she does what we want”. Mrs Rodriguez is no friend of the US and has already condemned what has happened to Venezuela as a barbarity”. As things stand, the rest of the Maduro regime is still in place including the all powerful and highly corrupt military forces which have protected Maduro and his pedecessor Hugo Chavez for so long. It is inconceivable that the old regime will allow the US oil industry to take over Venezuela’s primary national asset. Regime change must be a complete process to be effective but it is not clear if the US has the will to complete the process it has begun.

Even if a new Government is imposed in the next few days the companies will be wary of putting their staff in harm’s way and will require full scale protection for any presence on the ground in the face of potential local resistance. President Trump has said he “is relaxed about boots on the ground” but a long term presence would be expensive and risky and runs contrary to the opposition to the US making external commitments and “nation building” across much of the MAGA movement. Venezuela is twice the size of Iraq.

The companies are certainly capable of undertaking a detailed assessment of the state of the oil industry within Venezuela and of rebuilding the facilites where necessary. They will, however, very quickly raise the question of who pays for such work. The companies will be wondering whether the US Government has the appetite for a sustained security presence and a multi year reconstruction programme. From all available reports the condition of the existing production facilities, pipelines and other infrastructure is desperately weak and has a been a primary cause of the steady decline in oil production over the last decade. Twelve years ago Venezuela was producing 2.4 to 2.5 million barrels of oil every day. The figures now is below 1 million.

Reconstruction will be a costly process but will also take time. Many skilled staff from the industry have emigrated to escape the Maduro regime over the last decade and are not likely to be rushing to give up their new lives in the US and elsewhere to return home. It will take years to recreate the skill base on which PDVSA and the wider energy industry in Venezuela were built. It is hard to see how, even in an orderly political environment, oil production can be raised by more than a few hundred million barrels a day within the next two years. If US attacks on tankers carrying Venezuela oil are called off prices could fall a little in the net few weeks but the companies will be amused rather than worried by ill informed speculation that world oil prices will collapse on the prospect of Venezuela restoring production to 3 million barrels a day or more.

The concerns of the industry will extend more widely. Although firmly based in the US the American majors are global businesses and if the American action in removing Maduro provokes serious hostility American corporates assets could be targeted. All the companies have interests across Latin America. Exxon for instance has extensive interests in Guyana, the site of some of the world’s most extensive recent oil discoveries. The m also be concerned that the American take over of Venezuela threatens the interests (including substantial debts) built up there in recent years by China. Some estimates put the scale of Chinese investments and debts at more than $ 100 bn.

All this supports the view that the immediate corporate response to what has happened will be extremely cautious as reflected in Chevron’s careful statement

Against that, however, it is important to remember that the industry and particularly the oil majors think in decades rather than days. On a twenty year horizon a return to Venezuela, if the country can be stabilised, will be seen as a tremendous opportunity for open access to a new source of resources – not just of oil and gas but also of the strategic minerals which are important for the industries of the future. There has been no thorough survey meaning that all estimates are speculative but Venezuela’s Guyana shield geology in the south of the country is believed to hold substantial reserves of gold, iron ore, copper, nickel, cassiterite, niobium and other valuable minerals.

Access to Venezuela on the right terms will be seen as far more attractive in the long term than access to the other resource rich areas currently closed off to international investment such as Russia or Iran.

The military intervention in Venezuela has demonstrated America’s power and the willingness of President Trump to use that power regardless of the niceties of international law. Around the world many other countries – friends and foes – will be adjusting to that reality. Military force in itself, however, cannot produce instant results but if accompanied by a sustained plan to rebuild not just the oil industry but also the governance of Venezuela the removal of the Maduro Government could help build America’s own economic and industrial strength in the face of the continuing challenge from China.

Recent history suggests that the US is not interested in nation building. In Gaza a sort of ceasefire has been established but the need for reconstruction is being completely neglected. The benefits of regime change in Venezuela, however, can only be delivered if the nation is rebuilt and it is hard to see how that can be done without active and sustained American engagement. For Venezuela and the companies now expected to go in and invest billions so much now depends on how President Trump and his Government manage the Day After.

A ceasefire and the release of the Israeli hostages are great steps forward after two years of bitter conflict in Gaza. These first steps, however, are only the prelude to the challenge of reconstruction. If Gaza can be rebuilt there is a chance of coexistence and at least form of peace. If not, the present moment will be no more than an interlude before the next war begins.

Renewal of Gaza as a community will require disarmament by Hamas, the withdrawal of Israeli forces and the establishment of a credible process of governance.  But reconstruction also has a physical dimension – the rebuilding of what has been destroyed over the last two years.

Physical reconstruction can only be achieved if Gaza has secure energy supplies. Energy for emergency relief, for the removal of the rubble and the debris of war especially from the cities and then for the building of infrastructure including roads and housing and for the creation of a viable economy which can support two million people.

What follows is based on four bold assumptions. Three months ago each would have seemed incredible. Now, with all the caveats about the dangers of ever allowing optimism to colour one’s view of the Middle East, they are just conceivable though far from secure.

First, that the remaining elements of the Trump plan are implemented, even if imperfectly and without a full-hearted commitment to peace on either side.

Secondly that sufficient financial resources are available from regional players such as Saudi, Qatar and the Emirates, and from the US and Europe to fund a substantial reconstruction plan over the next five to ten years.

Thirdly, that the area is sufficiently stable to justify international private sector investment supported no doubt by state guarantees, but also strong enough to provide the basic standards of safety which companies will need before they send staff into the region.

Fourthly and crucially that Israel cooperates fully in the reconstruction process.

If any of these cannot be delivered reconstruction will be impossible and Gaza will remain a failed state with mass poverty and unemployment – the perfect situation for the revival of a militant organisation which will look very much like Hamas 2.0.  Although Israeli cooperation in the process of reconstruction is not explicitly included in Trump’s 20 point plan it would seem to be entirely in Israel’s self interest to do everything possible to avoid Gaza becoming the base for a new wave of terrorism.

The first of the necessary energy supplies will come as part of the emergency relief programme being put together by the United Nations and the international aid agencies.

According to the most recent published assessments by the United Nations around 83 per cent of all the structures in Gaza City have been destroyed as have 78 per cent of buildings across the rest across the 360 sq km of the whole territory. Some 60 million tons of debris wait to be cleared. Gaza’s power grid, such as it was, appears to have been almost totally destroyed.  The country’s single power station – run on diesel fuel supplied until the war by Isreal is reported to be damaged but not destroyed. The electricity supplies from Israel which flowed through the connection points at Eraz in the North and near Khan Younis in the South have been cut off since October 2023. It is not clear whether they can be reopened without major repairs. It seems a reasonable assumption that the entire grid system across the areas where the conflict has been concentrated will need to be rebuilt. The process of recreating the grid will be complicated by the risk of unexploded munitions and a shortage of skilled local workers. For some time the emergency relief effort will have to rely on mobile generators and makeshift local facilities such as roof top solar panels – devices which have been Gaza’s main sources of electric power for much of the last two years.  Additional supplies of oil could be brought in by road and gas could be imported using floating LNG facilities once the onshore infrastructure is in place to distribute the gas to end users.

Disaster relief is the immediate challenge but more substantial supplies, particularly of oil, will soon be needed for removal of the badly damaged buildings. Rubble clearance will require the use of powerful diggers and waste disposal vehicles as well as a highly skilled set of bomb disposal experts. Roads will need to be rebuilt to enable the clearance work to take place. The work involved will create some local jobs but most of the expertise required will have to be imported, with properly equipped camps for the workers involved.

As this proceeds the third phase of reconstruction must begin. The construction of new homes and basic social provision such as schools and hospitals will be priorities but reconstruction must also involve the creation of the infrastructure necessary to revive the economy. Even prior to the war Gaza’s economy was extremely weak and heavily dependent on international aid. Until 2007 much of the area’s income depended on the thousands of Gazans who crossed to work in Israel each day especially in the construction sector. It is far from clear that such work will be made available again even if the ceasefire holds.

Historically the Gazan economy has relied on trade in basic agricultural products such as citrus fruits, tomatoes, dates and wheat and some very basic manufacturing activity almost entirely for local use. Figures from 2020 show an economy in which the main sources of employment were local services almost all of which were paid for by international aid. Even before the current war began in October 2023 Gaza was one of the poorest regions of the world.

A restoration of basic agriculture will be necessary as will a revival of the area’s long standing but much diminished  fishing industry. Both have been damaged by war but their potential remains. Neither however seem likely to be sufficient to sustain an area which cannot rely for its long-term sustainability on generosity from the Gulf States or anyone else. International philanthropy has never been secure and once immediate relief from starvation has been achieved the strong risk is that attention will turn to the next crisis. Support from the developed world will also be fragile. Overseas aid has been cut from Government budgets in both the US and the UK – both once proud champions of development assistance. The US has long resisted the concept of nation building. European Governments, including the UK, are facing extremely high debt ratios and multiple calls on public spending.  Gaza will not remain a priority for long.

One answer may lie in securing a flow of export revenue based on the creation of energy supplies for other countries in the region and eventually the countries of Southern Europe.

Gaza has two key areas of potential. The first is the establishment of large-scale solar production which can meet the bulk of local electricity needs and provide a surplus for export through new grid lines to Egypt and potential through Cyprus to Europe.

The second potential source of revenue and trade is the offshore gas field, known as Gaza Marine discovered in 2000, 35 km off the Gaza’s coast. The field has never been developed because of the political situation but holds an estimated 1 tcf of natural gas For development to proceed Israel would need to confirm that the field is an asset which belongs to Gaza, a process complicated of course by the fact that Gaza is not as yet a nation state. In 2023 ownership of Gaza Marine passed from British Gas to the Palestinian Investment Fund and the Consolidated Contractors Group - the Athens based civil engineerng business originally created after the 1948 to provide work for the Palestinian diaspora. In June 2023 the Israeli government gave the go ahead for the field to be developed. That process was suspended in October 2023 – an early victim of the war.

The known unknown is whether Gaza Marine is an isolated field. Although the Levant basin – the area running parallel to the coast from Egypt and Sinai in the south to Turkey and Cyprus in the North has produced a number of finds including the very substantial Leviathan field offshore Haifa in Israel most of the area is unexplored for political reasons. A recent UNCTAD estimated that the reserves across the region amount to 122 tcf of gas and 1.7 bn bbl of oil.  If anything close to stability were to be achieved not just in Gaza but also in Lebanon and Syria the international oil and gas companies could bring major investment in exploration and development.

Gaza has a 40 km coastline and the chance of more finds in the offshore waters must be high. Natural gas could prove to be a significant source of revenue and economic stability which would the area time to develop a wider economic base.

There is some potential for tourism but it will be years before any sustantial number of Europeans or America venture to a Trump resort on the Gazan coast.

A more optimistic scenario is that Gaza could return to its historic role as a trading centre for the Eastern Mediterranean. As well as using and expanding the existing harbour near Gaza City there is also the potential for physical trade in energy supported by new infrastructure carrying natural gas and electricity. That trade could extend the existing links between the immediate neighbours – Egypt and Jordan - which are energy poor- and Israel and Lebanon which both have potential to export both natural gas and solar power.

Energy is a vital input to each phase of the renewal of Gaza. At each stage many billions of dollars will be necessary on a multi year basis. So will patience and the willing cooperation of all parties, including crucially the Israelis.   In post war Germany the allies had won and could shape the process of reconstruction through the Control Commission which used a combination of public and private investment to rebuild the Germany economy. There was no resistance to be overcome and Germany although heavily damaged by the war retained strong industries and a skilled workforce. Such conditions do not exist in Gaza.

The coordinating group established under the terms of the Trump plan does not have the power of a victorious occupying power. There are still many different views as to the shape of the “day after”. The aspirations of the Palestinians for an independent state remain undimmed and the resistance of many Israelis to any such idea is as strong as ever. The Qatari negotiators who managed to achieve agreement on phase one of the Trump have made clear that they consciously avoided debate on many of the other steps because they believed that unresolved conflicts about the future could jeopardise the fragile agreement on phase one.

The road to the ceasefire and the release of the hostages has been hard. The next steps will not be easier.