The war in Iran, now a full-blown regional conflagration, has disrupted the flow of energy supplies from the Middle East to the rest of the world. Iran is the sixth-largest producer of crude oil in the world, most of which goes to China. Far more is produced by Iran’s neighbors. The Strait of Hormuz — which the Islamic Republic has threatened to block — carries around 20 percent of the world’s oil. If tankers can’t get out of the Persian Gulf, the rise in oil prices will be astounding.
Natural gas supplies have also been threatened. Qatar, the third-largest exporter of liquefied natural gas, halted production on Monday after Iran struck its facilities. Most Qatari gas goes to Asia, but Europe has been increasing its reliance on the Middle East as it weans itself off Russia.
Because of differences in how oil and natural gas are traded, Americans are getting both good and bad news on energy prices. The price of crude oil is set internationally by a highly fluid market worth over $1.3 trillion. A barrel of oil drilled in Saudi Arabia could just as easily be refined and consumed in Poland as in California. This is great news when domestic oil supplies are tight, because American refiners can purchase crude from nearly anywhere in the world.
It also means that supply disruption anywhere raises prices here. If Asia and Europe can’t get the oil they need from the Middle East, they will buy more from other places, including the United States. That puts them in competition with American buyers, who will have to pay more to keep oil flowing. As of Tuesday, crude oil prices have hit to a one-year high of almost $75 per barrel. Expect that jump to translate into higher gasoline prices very soon.
Natural gas, on the other hand, is a very different market. It is typically traded regionally, not globally, since most natural gas is transported via pipeline. Gas can only be transported by sea once it has been liquefied for that purpose, so it usually stays on the same landmass where it was extracted.
Because natural-gas markets are segregated, prices tend to diverge greatly by region when supplies are disrupted, and America’s distance from combat zones gives it protection. In 2022, when Russia invaded Ukraine, natural gas prices skyrocketed in Europe and Asia but stayed moderate in the United States. This week, U.S. natural gas prices have risen by less than 14 percent and are still lower than a year ago. In the European Union, they have spiked by 36 percent and are the highest in over a year.
European leaders are likely to get squeamish about both oil and gas prices as the Middle East war goes on. Americans are exposed to the former but mostly insulated from the latter. If anything, we can help Europe out by boosting our own liquefied natural gas exports to cover the shortfall.