Seismic changes are underway in the global energy landscape.
After months of oil and gas market turmoil, the recent agreement between the United States and Iran aimed to reopen the Strait of Hormuz and provide the foundation for a lasting peace. There were signs of oil and gas exports through the strait increasing considerably in the weeks since the deal was agreed, bringing much-needed relief to strained markets.
Seismic changes are underway in the global energy landscape.
After months of oil and gas market turmoil, the recent agreement between the United States and Iran aimed to reopen the Strait of Hormuz and provide the foundation for a lasting peace. There were signs of oil and gas exports through the strait increasing considerably in the weeks since the deal was agreed, bringing much-needed relief to strained markets.
These are welcome and encouraging developments, although the renewed exchanges of fire this week underscore the high level of uncertainty over what will happen in the coming weeks and months—and the risks for global energy supplies. Whether the conflict continues to escalate again or is brought to a permanent end, it won’t stop the larger changes already taking place in the energy world following two major international supply shocks in the space of five years.
At the start of this decade, there were two main arteries for international trade in oil and gas. The first was based on the match between Russia’s resources in western Siberia and the large, import-dependent European market. The other was the complementarity of the huge energy reserves in the Middle East with the rising import needs of Asia’s large and growing economies.
Both of these overarching trade relationships had ridden through times of geopolitical strain. They were assumed to be stable because the underlying economics were so powerful. None of the parties involved seemed to have an interest in disruption.
Nearly five years later, both trade relationships—which had seemed to be built on unshakable economic logic—are now profoundly changed.
Russia’s invasion of Ukraine and abuse of its position as Europe’s major natural gas supplier led the European Union to commit to phasing out imports of Russian gas completely before the end of this decade.
The Iran war, meanwhile, turned the Strait of Hormuz from a bustling waterway through which a fifth of the world’s oil and gas supplies flowed freely into a treacherous gauntlet that many vessels dared not attempt after the war began.
In my conversations with government leaders and heads of companies, the prevailing view is that there is no going back to the way things were before the war began on Feb. 28. However the conflict and the peace negotiations play out, the world has now seen that the strait can be closed from one day to the next. The confidence in the waterway as a trouble-free trade route has been shattered.
These two major shocks of 2022 and 2026 challenge the basic premise of interdependence on which the international energy architecture was built. Many of us had come to think that energy trade was primarily driven by economic imperatives. But in today’s world, trade in energy and other commodities are becoming geopolitical levers—a potential strategic advantage for some, and a potential strategic weakness for others. This is a profound change, with implications across the energy system and beyond.
Geopolitics has always been intertwined in the energy sector to a greater or lesser degree, given its fundamental role in modern economies. But in recent decades, the trend toward globalization and more open markets had made business and economics the driving forces for the industry.
The spectacular rise of the U.S. shale industry in the past 20 years is a clear example of how innovation and economic competition were transforming the global market. The United States went from being the world’s largest oil importer as recently as 2013 to becoming a major exporter within a decade. In parallel, rapid cost declines for solar panels, batteries, and electric vehicles made clean energy increasingly competitive, turbocharging their deployment, with far-reaching implications for energy systems around the world.
But now, we see the global energy system increasingly being shaped by geopolitical forces rather than business and economic considerations. The trend is not limited to oil and gas. China last year showed its potential to use its powerful position in rare earth supplies, which are important for key energy technologies and other strategic industries, as leverage with some economies.
The implications of this shift will be long-lasting. The energy sector is capital-intensive, so decisions on investments and partnerships have to take a long view. Today’s disruptions are already prompting many countries to review their energy strategies and investment plans.
As they do so, the world could see a reinforcement of some trends that were already visible in the aftermath of the global energy crisis of 2021-23. Since 2021, there has been a major shift in capital spending among energy importers in favor of domestic-based energy sources that reduce the need for fuel imports. This means more demand for renewables, nuclear power, EVs, and batteries—but also coal in some cases.
When countries look to international markets and make decisions on which fuels and technologies to import, on where to invest, or which trade routes and suppliers to rely on, one of the most important factors will be trust.
Rather than just choosing whoever can provide the cheapest option, companies and countries will place new geopolitical risk premiums on supplies coming via routes that once seemed to be safe bets. Price will be weighed against predictability.
There will also be a major push for diversification, in different ways. For producers in the Middle East, the search has already begun for additional alternative routes to market—for energy and for other commodities and goods—that avoid the Strait of Hormuz. The United Arab Emirates, for example, is fast-tracking construction on a second line that brings oil to the port of Fujairah, on the south side of the strait. Gulf oil producers are also looking at other solutions to reduce reliance on the strait, like building up oil stocks directly in importing countries.
Outside the Middle East, producers are also looking to expand their access to other markets. Take, for example, the renewed push to develop oil and liquefied natural gas infrastructure in Canada to bring resources to Asia and Europe.
From a consumer perspective, the priority will be to make the overall delivery system more resilient—moving from a “just-in-time” approach to a “just-in-case” one. But all of this comes with additional costs and potential trade-offs with the affordability of energy supplies.
Building alternative routes to market, strengthening supply chains, allowing for greater redundancy and lower utilization rates for backup infrastructure, and investing in inventories and other buffers all make the energy system more secure—but also more costly.
The global energy map is being redrawn in real time. The question of who trusts whom will shape the contours that emerge. Clearly, however, we are all starting to pay the price for living in a low-trust world.
