By Grant Griffiths and Dylan Campbell
The current events unfolding in Iran and across the Middle East once again highlight the continuing importance of hydrocarbons to our global economy, and their impact beyond the here and now of a gas or oil supply shock.
Maritime chokepoints like the Strait of Hormuz present an unavoidable risk; it’s typical of a geophysical constraint that cannot be solved through good faith reliance on the traditional geopolitical global order, nor the stroke of a bureaucratic pen. This is further exacerbated by the modern world having organised itself around efficiency, cost minimisation, and logistical precision. This has created a supply chains that are so sensitive to interruption that an event around one narrow corridor can propagate outward into a general crisis for the world.
Energy markets are relatively simple animals when it comes to economics and pricing: energy prices will always boil down to the fundamentals of supply and demand, and these are driven by a range of factors often well outside the control of energy companies and their extended enterprise.
Context
The Strait itself is one of the world’s most important shipping lanes, representing a critical route for the export of oil and gas around the world. Only 39 km wide at its widest point, this body of water separating the mainland of Oman from Iran is unique in its location and purpose, as it facilitates the transportation of 20% of global LNG and crude oil demand. It is a chokepoint which is susceptible to disruption and blockage in a region with a high potential for political instability. Like the Suez Canal, the Strait of Hormuz represents a single point of failure – or success – in the global energy supply chain.
Key beneficiaries of the Arab countries’ oil and gas exports include global powerhouse economies such as China1 (accounting for 4.46 Mn bpd), India2 (2.06 Mn bpd), Japan3 and South Korea – all shipped via the Arabian Gulf and Hormuz Strait – where oil and gas (transported as LNG) are used for transportation, energy production, industry and for many other everyday essentials.
The Strait has been a point of both economic and political leverage for decades yet this risk has been tolerated through good times and bad and 2026 is not the first time events have taken a turn for the worst in the Strait of Hormuz. Further exacerbating the situation are the attacks on major energy infrastructure which has resulted in a temporary scaling-down of assets and production across the Gulf region. The obvious financial and economic impacts of reducing or ceasing production in these hydrocarbon dependent economies are potentially catastrophic, carrying the potential to trigger major economic downturns.
Why we’ll be paying more
Despite the drive towards low-carbon energy, the reality is the world relies on fossil fuels for transportation, the production of energy (mainly electricity) and in the manufacture of a wide range of goods. When there is a shortage of oil or gas the established paradigm of the available money chasing a scarcity of goods kicks in, just as it does with most other things in life. It is generally accepted that a US$10 increase in the price of crude oil results in a 25 to 35 basis points increase in inflation.
Consumers first notice the effects of a major supply event when they go to fill up their cars with petrol or diesel, and for businesses these costs are built-in to the cost of goods and services, triggering price rises in these goods and services. These cost increases are driven by many factors, the most obvious being the commodity price increase set by producers and market forces, along with increased shipping costs, increased insurance costs and other costs such as wages and operational overheads.
Increased costs to business and consumers trigger a wave of inflation, in turn exacerbating underlying financial and economic weaknesses on a national basis, and carrying the potential for wider global economic downturn. It is interesting to note how the magnitude of price changes during times of a crisis such as those we are witnessing right now are not as severe as they have historically been, perhaps suggesting the market is pricing in a quick resolution to the conflict, though this remains to be seen
Additional potential supply chain risks emanating from this crisis
Aside from the first order impacts associated with constrained oil and gas exports described above, there are other potential second and third order impacts that may ripple across the downstream and petrochemical value chain.4
How did we get here?
Despite multiple past events – including weather-related, geopolitical, supply chain and economic – there is clear evidence that the lack of action in addressing the embedded systemic risks such as supply chain bottlenecks and energy policy uncertainty, have conspired to work against progress.
Some measures are already in place to help mitigate the effects of disruption around the Strait of Hormuz however these are limited in nature. The UAE has the Fujairah Oil Industry Zone, a bunkering hub located on the east coast of the UAE which facilitates the transportation of oil to a location just outside the mouth of the Strait. This facility is fed via the Habshan-Fujairah Pipeline. But this has limitations; Fujairah was hit by debris from an intercepted drone, rendering it inoperable for the time being.
With all the discussion and the investment in green energy it’s to be expected that dampening in the level of energy price rises in times of crises would be the new norm.
Reality is something entirely different.
The transition away from reliance on fossil fuels takes time, and requires a consistent, transparent regulatory environment for success. It’s often debated that the lack of co-ordinated global policy is perhaps the single greatest inhibitor to success and without consistent and stable signals from governments, weaning the world off its dependency on fossil fuels within the currently published timelines is a stretch too far.
Solving the challenges of high energy prices and geopolitical risks
Energy prices will always boil down to the fundamentals of supply and demand economics. And while there will always be natural disasters, labour shortages and strikes, changes and a lack of clarity in institutional policy, and the advent of new technologies to deal with, the cold hard reality of geopolitics will always present the greatest uncertainty for the energy sector, the world’s economy and wider society.
Long-term solutions to address and circumvent the constraint and risks of a single point of failure such as the Strait of Hormuz requires vast amounts of capital, and it also requires political will and a commitment to co-ordinated action by governments and regulators. Constructing pipelines, new ports and bunkering hubs for fuels may be one possibility however this approach still carries significant risks such as the potential for possibly greater environmental damage should they be the target of physical attacks. Finding a way around the risks associated with acts of war and insurrection will remain illusive, and efforts at mitigating against these risks will remain highly challenging, and come with high levels of complex and cost.
Many advocates for low carbon and net zero are highlighting the current crisis as reason for flicking the switch and moving away from reliance on fossil fuels within a more immediate timeframe but doing so is already proving to be difficult, complex and expensive, and is clearly not a silver bullet for solving the energy supply / geopolitical risk dilemma. There are two sides to the story: Accelerate carbon reduction and reduce reliance on fossil fuels for which there is a strong case, or increase investment on maintaining a higher mix of hydrocarbons in the global energy future.
Given current events, many will see the former as being the panacea for the ills of global reliance on fossil fuels. There is also an equally strong case for leveraging the established resources, capabilities and infrastructure, developed over a very long period, associated with oil and gas as a key component in our energy future, but with the caveat of ongoing geopolitical instability and supply chain risks which won’t go away any time soon. A structured approach to maintaining the right balance of renewables, fossil fuels and other emerging technologies and alternative methods provides a pathway in which the long-term aspirations for net zero can be met, while keeping the lights on and providing stable and sustainable financial returns for investors.
In summary
In the case of the current crisis – the Middle East, Iran and the Strait of Hormuz closure – we are witnessing a classic case of supply chain and market risks triggered by geopolitical events; it’s the perfect storm of what can happen when a rogue nation decides to unbalance the global order. From a risk practitioner perspective it provides a timely and prescient reminder of the need to understand and monitor both the complex supply chains sitting behind our business along with the external environment which, as we know from history, is never static.
At the end of 2025 the IRM’s Energy & Renewables Special Intertest Group compiled our insights on the year ahead and now that we’re here, 3 out of our 4 main drivers have already emerged, and a number of the risks we identified are playing-out as anticipated. The move away from dependence on fossil fuels is, or should be, a long-term strategic play which successfully balances the reality of the world in which we all live with the aspirations of the new green dream.
In getting there, global energy and supply chain risks need to be addressed, not ignored.
Footnotes:
1 China is the world’s second largest importer of oil.
2 India is the world’s third largest importer of oil.
3 Japan is the world’s fourth largest importer of oil.
4 Systemic Risk: A 12-Order Cascading Analysis of a Zero-Flow Strait of Hormuz Closure – X post by @ctindale on 6-Mar-26
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