Energy Musings - March 9, 2026

The closure of the Strait of Hormuz has shaken up global oil markets. We believe it should be a wake-up call for governments to institute policies to ensure "energy security" for the future.

Iran Reshapes Global Energy Security Strategies

The war between the U.S., Israel, and Iran has upended global energy markets. The effective closure of the Strait of Hormuz, a major oil chokepoint, has eliminated nearly 20% of daily global oil supply. Oil prices have spiked above $90 a barrel for both Brent and WTI as the world deals with the impact of losing such a significant share of global supply.

Reactions to the closing of Hormuz include China, a significant consumer of Middle East oil, banning its refiners from exporting refined petroleum products. As we have written about before, China has been capitalizing on low oil prices to build its strategic oil reserve as protection against the eventuality of an oil chokepoint closing. Now that it has happened, China is reacting to protect its oil supply, given the uncertainty of how long the world will be without this oil flow.

An equally significant announcement from ExxonMobil was that it would be shipping gasoline, diesel, and jet fuel from its U.S. refineries to Australia. The shipments of around 600,000 barrels of fuel are to cover the company’s own needs in Australia. ExxonMobil operates three fuel terminals in Australia that normally receive refined products from Asian refineries for distribution to local markets, and a subsidiary, Mobil Oil, that supplies fuel to Australian retailers. The shipments will be made by using two medium-sized tankers, currently under charter to commodity trader Vitol. They will load their cargoes this week and head out on a seldom-used trade route, illustrating how challenging the loss of Middle Eastern oil supplies is becoming. It is estimated that the charter cost for a medium-range vessel capable of carrying 300,000 barrels of refined products on this route is around $6 million, or $20 a barrel.

We fully expect to learn of other unusual steps oil companies and governments will take to address crude oil and refined product shortages. Besides scrambling for alternative oil supplies, regardless of price. Rationing should be expected, although the mechanics are challenging for economies not accustomed to such measures. The U.S. used rationing schemes in 1973-74 during the Arab Oil Embargo.

While there is a significant volume of sanctioned Russian crude oil in tankers, it will require official relief before many buyers will tap this supply. The U.S. has just granted such dispensation to India. That relief may be broadened quickly. The bigger problem for consumers is that there is little additional oil production capacity available outside of the Middle East to offset the shortage, so without a reopening of the Strait of Hormuz, scarcity and high petroleum prices will continue.

The rise in global oil prices to levels not seen since early 2025 has many media outlets hyperventilating about the damage it will do to economies. Here is a chart of oil prices during 2022 and 2023, encompassing the start of the Ukraine-Russia war.

The Ukraine-Russia war sent oil prices higher than they are now.

Surprisingly, despite months of oil prices being above $100 a barrel, there was no global recession as predicted by numerous economists and politicians. There is no guarantee we can avoid a recession this time, although currently the odds remain low.

Crude Oil

Let’s look at the global oil market and its logistical challenges. Although the chart of world oil reserves and production is a little old, it is a good visual to define the problem of energy security. The largest oil reserves are in Venezuela, Canada, and the Middle East. The U.S., Brazil, Russia, and North Africa also hold very large oil reserves.

In terms of production, OPEC member countries in the Middle East dominate at 20 million barrels a day (mmb/d), led by Saudi Arabia. However, the United States has become the world’s largest individual oil-producing country at 13.7 mmb/d, followed by Saudi Arabia at 10.9 mmb/d and Russia at 10.8 mmb/d. Canada at 5.9 mmb/d and Iran at 5.1 mmb/d follow the leaders.

The world’s oil production and reserves are concentrated in the Middle East.

Given the concentration of global oil production in a handful of countries, maritime transportation has become a critical component in the industry’s smooth operation. Fossil fuels account for 40% of global shipping cargo annually. This is an aspect of the global oil industry that the public does not appreciate until it is disrupted, as it is now. Normally, ships load their cargoes and set out to sea, where they will spend days and weeks before reaching their destinations. They unload and begin heading to the next pickup location. Because they are seldom seen, ships are not appreciated sufficiently for their role in keeping the global economy, and especially its energy component, running smoothly.

As of 2024, the latest available data from the UN Commission on Trade and Development (UNCTAD), the global vessel fleet had 12,500 oil tankers, representing 11.5% of the world fleet. These tankers are the lifeblood of the global oil industry, transporting crude oil from well sites around the world to refineries, where it is processed into petroleum fuels and other products for the economy. For countries lacking refineries or with inadequate refining capacity to meet local demand, oil tankers also deliver refined products.

The map gives a flavor of the routes oil tankers take to bring their cargoes to the buyers. Many of these routes are thousands of miles in length and take weeks to complete. They are often subject to change because of unsafe conditions. Recently, oil tankers heading to Europe with Middle East cargoes were forced to take a longer route, going around the tip of Africa rather than transiting the shorter Red Sea, Suez Canal, and Mediterranean route. The shift was dictated by attacks on oil tankers by the Houthis, a proxy of Iran, in Yemen. The potential for physical and human damage led insurance pools to drop coverage for tankers taking the shorter route, or they increased premiums by 3-4 times, making these voyages unprofitable. The longer charter route increased the delivered cost of oil cargoes.

Most oil production travels thousands of miles to consumers.

Natural Gas

Shifting to natural gas, its role in the global energy slate is growing. Once considered the bridge fuel from the Oil Age to the Renewable Energy Age, natural gas is in high demand because it can power generators that produce electricity at high capacity. Because it is a gas, the logistics of natural gas require it to move via pipelines or in liquefied form. The latter requires that the gas be cooled to –260º F and then transported in pressurized, insulated tanks to prevent it from re-gasifying. The development of LNG technology has enabled the exploitation of gas discoveries in remote locations far from consumers.

The Middle East war has significantly impacted the LNG industry. In retaliation, Iran has fired missiles and drones at civilian, military, and petroleum industry facilities in numerous countries around the Persian Gulf. A drone strike damaged the processing plant and ship loading facility in Qatar, the world’s largest LNG provider. Roughly 20% of the world’s LNG passes through the Strait of Hormuz daily, with Qatar the primary supplier.

QatarEnergy, the state-owned LNG company, declared force majeure and shut down its Ras Laffan Industrial City gas complex for repair. It also stopped loading gas carriers because it was concerned about attacks on those vessels. While it has not announced the magnitude of the damage or how long it will take to repair, QatarEnergy has explained the lengthy process it will need to go through before shipping the next LNG cargo. It takes about two weeks to bring the liquefaction plant down to the proper temperature to begin freezing the natural gas. Then, it will take roughly another two weeks before the cooled gas can be loaded on a tanker. Assuming the plant is repaired and ready to go once hostilities end, the global LNG market will be looking at an additional month before a cargo will be ready to travel.

The loss of Qatari LNG has severely impacted the European and Asian gas markets. The Dutch TTF benchmark gas price in Europe climbed about 70% in the first two days following Qatar’s LNG shutdown. With Europe’s gas storage volumes below 30% of capacity, and down from 37.5% at the same time last year, buyers are scrambling for alternative supplies to prevent gas shortages in Europe. However, LNG is a global market, and several U.S. and Nigerian LNG cargoes are being diverted from the European market to Asia, where buyers are willing to pay more. Gas analysts are speculating that the TTF may have to rise another 40% to 50% to prevent European LNG cargoes from diverting to Asia. European gas is already expensive, boosting customer utility bills and impacting the competitiveness and profitability of Europe’s industrial sector. It is likely to become more expensive and possibly delay the refilling of storage ahead of next winter.

LNG has become a global industry, which is now being disrupted.

The following chart shows the distance and the number of days required for an LNG cargo to reach Asia from different locations. What we see is that cargoes coming from the West Coast of North America take less time than cargoes from Qatar. LNG from Australia and Mozambique is also readily available. Cargoes from other producers add meaningful days and costs to the delivery times.

North America has an advantage in meeting Asian LNG demand.

Coal

Coal is the third-largest global fossil fuel and must be reassessed in light of the war with Iran. The use of coal to power industries and generate electricity has been growing, although it has been declining in developed economies since the 1990s. The decline has been driven by the ability to switch to cleaner natural gas. The International Energy Agency has been predicting a peak in global coal use for many years, but the predictions have failed. They are now predicting that global coal consumption will continue to grow over the next few years, then peak and begin to decline. We will see if this prediction comes to pass.

Often, coal use increases in developing countries because it is the cheapest available energy source and because it involves mining domestic deposits. Mining creates jobs, something developing economies, especially those with large populations, need. Using domestic coal is usually cheaper than importing oil or natural gas.

While coal reserves are found on all continents, they are more often found in the Northern Hemisphere, where coal usage is declining. In these countries, coal has become an export industry. Coal volumes shipped by sea have been rising. Given the prospect of increased coal consumption, the maritime industry will benefit but also become a potential point of disruption in certain circumstances. The Strait of Malacca chokepoint is usually considered an oil chokepoint. Still, growth in coal consumption in China, Asian countries, and India could be at risk if passage through this strait were restricted.

Coal is often overlooked when assessing the global energy industry.

Coal was at the center of the first energy transition. When wood became scarce, especially near cities, local coal deposits offered another fuel source. People soon discovered that the energy density of coal was significantly greater than for a similar volume of wood. Coal provided intense heat, facilitating the development of industrial manufacturing processes that meaningfully boosted economies and improved living standards. The greater energy density of coal fostered the development of steam engines, which revolutionized the industrial sector along with the global shipping industry. With steam power, ships could adhere to a schedule because they could leave and arrive regardless of the state of the tides or the wind.

The following chart shows coal use by several leading countries since 1900. Coal use in the United States grew from 1900 to 1960, then rose by about 50% at the turn of the 21st century, after which it began to be displaced by natural gas, reducing carbon emissions.

China leads the world in coal consumption.

In the late 1950s, China began an industrialization push that capitalized on its domestic coal resources. After growing at a healthy rate until the late 1990s, coal consumption soared. It needed more electricity to power its industrial business model. Coal use grew following China’s admission into the World Trade Organization. The government based its economic plans on building a handful of industries that could compete globally, benefiting from China’s pool of low-cost labor. The government provided cheap capital and ensured that adequate, cheap energy would be available. This triumvirate of inputs powered China’s industrial strategy, which remains in place, although several of these industries have outgrown local market demand and have now become serious competitors to Western companies.

The Chinese coal use story is being followed in India, where expanding its industrial sector is critical to improving living standards for a nation whose population will surpass China’s in the foreseeable future. Again, domestic coal deposits provide jobs for locals. Other Southeast Asian economies are following the growth plan of both countries.

Like oil and gas, a global transportation system moves coal from mines to consumers. In this case, the movement is from miners in developed economies to consumers in developing economies. Bulk carriers are the primary shipping vessels because they can be loaded and offloaded quickly.

The global coal industry has a concentrated distribution network.

In 2024, fossil fuels provided 86% of global primary energy, down from 93% in 2007. Climate activists have been pushing for an energy transition for years. They are learning that such transitions are slow to evolve, and the current one is not unique. At the current pace of transition, it will take 215 years to eliminate fossil fuels from our energy system.

The reality is that there has never been a real energy transition. Today, we burn more wood than ever before, and the same is true for coal. To think that we will completely displace oil and gas with renewable energy in the foreseeable future is a fantasy.

Energy Security

The closure of the Strait of Hormuz has highlighted the issue of energy security for governments. Energy security is really national security. Keeping people safe is the government’s most important task. Without energy, there is no economy. Without energy, living standards will deteriorate to subsistence levels. Riots and death soon follow.

What should governments and the energy industry do? They need to create a system that cannot be disrupted by a geopolitical event, such as the one underway in the Middle East. That means having access to fossil fuel production and the ability to control the logistics of moving the output to the country’s consumers.

The International Energy Agency’s World Energy Outlook 2025 predicts that oil use will grow steadily until 2050, and likely beyond. This is a reversal of previous forecasts calling for a peak in oil use by 2030, followed by a steady decline as renewables displaced fossil fuel consumption. After five years, the IEA has changed its tune by restoring the Current Policies Scenario to its forecasting suite. CPS is close to a “business as usual” scenario and is based on existing government climate change policies rather than aspirational scenarios for a rapid replacement of fossil fuels.

As the IEA reversed its peak oil scenario, it signaled that the international oil and gas industry must significantly increase its spending on new exploration and development to avoid a future spike in oil prices. This was another shocking reversal by the agency, as previously it had told the oil industry it did not need to develop additional resources. It warned that new resources would become stranded assets.

To enhance energy security, the oil and gas industry should direct its exploration and development efforts to areas outside the Middle East or other regions where the flow of hydrocarbons to consumers could be shut down.

Such a strategy means companies will be seeking new production in more remote areas. That means they will need to build new production infrastructure that will increase the cost of developing discoveries. In turn, producers will need higher oil prices to generate the required return on investment to justify proceeding with such projects. Governments may need to redesign tax policies to help oil companies balance oil prices with their return calculations.

To further increase energy security, governments should establish a national fleet of oil tankers to ensure that our adversaries cannot compromise the transportation of produced crude oil. These oil tankers do not need to be owned by the government, but should be flagged by the host government, allowing it to commandeer vessels when and if needed.

Governments should also promote the construction of new refineries to prevent countries from being at risk of an inadequate supply of refined petroleum products. Having access to crude oil is important, but economies need refined products to operate.

With respect to LNG, a similar exploration and development strategy should be followed. This will be harder because of the huge upfront investment required in building a liquefaction and shipping facility. The nature of LNG projects requires natural gas discoveries to be larger than those for crude oil because of the greater infrastructure investment.

Having a fleet of host-country-flagged LNG carriers available would also be an insurance policy against disruptions to the flow of gas. Such a fleet could be assembled in the same way as for oil tankers.

Coal will require different strategies. Countries burning coal but lacking domestic resources must work to develop alternative suppliers and establish control over the logistics network to ensure that those supplies can always reach the country.

However, for countries with coal deposits that are actively mined and exported, but not used domestically, little needs to be done. However, countries exporting and consuming coal should ensure they have mothballed generating capacity to provide their electricity grid operators with greater flexibility in meeting domestic power needs if global energy markets are disrupted. Domestic coal could be used to offset reduced supplies of crude oil and/or natural gas.

These recommendations will require countries to create policies to make the plans work. That may also entail changing tax policies to encourage the fossil fuel companies to direct their capital investments in a manner that supports the government policies. Governments must lobby the international oil and gas companies to influence their spending patterns. Governments could also direct their energy agencies to identify exploration targets using their existing resources or invest in new exploration assets, such as seismic surveys, in prospective areas that could be made available to the industry.

These efforts will take time and require increased government expenditures. They may also require hiring consultants and/or employees with the necessary skills to develop and implement the required policies.

What should the United States do?

In 2025, the U.S. imported 5.9 million barrels per day (mmb/d) but exported 10.7 mmb/d, for a net export of 2.8 mmb/d. Oil from OPEC member countries in the Middle East averaged 659,000 barrels per day last year. Roughly 50% of that oil came from Saudi Arabia, largely to supply its Port Arthur, Texas, refinery. Saudi imports account for about half of the Gulf Coast refinery’s daily throughput. Fortunately, Saudi Arabia has alternative supply options available. Its cross-country oil pipeline allows nearly 5 mmb/d of exports to the Red Sea terminus. Saudi Arabia also maintains storage in various locations around the world, indicating that its national oil company has prepared for the potential disruption to oil exports caused by a Strait of Hormuz closure.

The U.S. has become “energy dominant” because of the Shale Revolution and its surging natural gas production. Twenty-five years ago, before shale development, the U.S. imported 2.8 mmb/d from Persian Gulf producers, accounting for 23% of total imports. It wasn’t until 2005 that U.S. oil imports peaked at 13.7 mmb/d. From a major oil importer, the U.S. has become a net oil exporter.

Reports indicate that the Trump administration is arranging to bring more Venezuelan crude oil to the United States as insurance against any shortfall from the loss of Middle East oil supplies. The government should impose a nominal fee on the imported Venezuelan barrels. The funds collected should be used to purchase existing oil tankers and change their registration to the U.S. flag. This would be the quickest way to rebuild the U.S. oil tanker fleet, while ensuring a tanker fleet is available to move oil supplies from abroad to the U.S.

These strategies would supplement those contained in the Ships Act. The policy actions contained in the proposed legislation are designed to promote domestic shipbuilding, increase our mariner and skilled shipbuilding labor forces, and revitalize the U.S. maritime industry. The closure of the Strait of Hormuz, while inflicting minimal pain on American consumers, should be a wake-up call to institute policies to safeguard our energy security. Those policies would ensure that our national security is not compromised.