In these turbulent times, the first thing to recognize is that the widespread expectation that global oil and gas markets were moving into a period of abundance and low costs will not materialize. That is not a prediction but a fact. The loss of Qatar’s entire gas production has removed 20 percent of global supply of liquefied natural gas (LNG)—a key fuel for power generation, heating, transport, and fertilizer production. Qatar estimates that it will take three to five years to fully repair its facilities, given the extensive damage to its production and liquefaction infrastructure. This also puts on hold a major production expansion that Qatar had planned. The result is a global market that has flipped from slight oversupply to significant undersupply within a month.
The situation is similar for oil. About a third of all refineries across the Gulf region have been damaged by Iranian attacks. Many oil fields have had to shut down because the closure of the Strait of Hormuz has blocked their route to customers around the world. Restoring this production and repairing the damaged refineries will take years, not months. It is impossible to bring in additional supply quickly enough to fill that gap, which means the only possible response is immediate demand reduction.
This will take various forms, depending on countries’ previous reliance on Middle Eastern oil and gas, as well as on their governments’ ability to access alternative supplies or switch fuels. Europe now faces its second fuel crisis within five years, the first having been caused by Russia’s pipeline gas cuts in 2022 and Europe’s oil sanctions on Russia in response to Moscow’s invasion of Ukraine. Although Europe probably has the fiscal capacity to secure enough fuel, rising prices may still push most of its economies back into recession.
Asia and Europe Will Suffer
The biggest problems will emerge in Asia, where more than 80 percent of the Middle East’s oil and gas is typically sold into the Indo-Pacific region.
Here, the market is broadly split in two. On one side are the wealthy and highly industrialized countries of Northeast Asia: China, Japan, and South Korea. On the other are the less wealthy but fast-growing emerging markets of South and Southeast Asia—including Bangladesh, India, Pakistan, the Philippines, and Vietnam. What binds all of them together is a high degree of reliance on Middle Eastern oil and gas. What divides them is their ability to access alternative sources of energy.
There will be two phases of adjustment, and both will be painful and costly, albeit in different ways. First will come the knee-jerk reactions: emergency measures taken because many governments have been too complacent to prepare properly for such a crisis, and too weak or timid to respond effectively to the disruptions that have now emerged. Once the conflict ebbs, many officials and executives will hope that things return to the way they were before the war. That will not happen. Even if the war ends quickly, the damage will be too extensive and too widespread.
Past energy crises—such as Europe’s gas crunch after the loss of Russian pipeline gas in 2022, Japan’s loss of much of its nuclear power fleet after the 2011 tsunami, and the U.S. and European oil shock during the 1973–74 OPEC embargo, then called OAPEC, for the Organization of Arab Petroleum Exporting Countries—have shown that such disruptions trigger permanent change.
That means the knee-jerk reactions will be followed by a deeper restructuring—a reckoning, if you will. People and investors will be angry after enduring energy shortages and price spikes. This reckoning is likely to take two main forms: diversification of supply through new long-term agreements, and fuel switching to reduce overall import dependence, largely through electrification.
The result will be a changed world. Exactly what it will look like is impossible to predict, especially while the war continues. Yet some predictions can still be made by identifying the regional hotspots that are especially exposed to the emerging energy crunch, and by assessing their ability to respond to the crisis.
Knee-Jerk Reactions
The first policy responses appeared across Asia within a month of the start of the war. They included the introduction of a four-day working week in the Philippines, extended school and university holidays in Bangladesh, and air-conditioning cooling limits in parts of Southeast Asia. European countries may yet follow with measures such as inner-city driving restrictions, lower speed limits, or even monthly fuel purchase limits.
These are knee-jerk reactions: reflexive policy responses that are quick and easy to implement, but largely ineffective over the long term. As a result, bigger and more forceful measures are likely to follow as governments and businesses search for ways to improve their long-term energy resilience.
Wealthy countries such as Japan and South Korea will use their fiscal power to secure energy supplies even at sky-high prices in order to avoid shortages. Many governments will also provide financial support to companies and households. Europe is likely to follow a similar pattern. Poorer countries across South and Southeast Asia, however, do not have that luxury.
Fuel shortages first emerged in Asia by the end of March, particularly in the refined fuel and petrochemical sectors. Prices for ethylene, a compound used in almost all plastic products, doubled within a month to more than $1,400 a ton, while the cost of other common petrochemical products such as propylene also surged. Jet fuel prices at Asia’s oil trading hub in Singapore nearly tripled to $225 per barrel during the first month of fighting. Prices for bunker fuel used in shipping almost doubled to $135 a barrel.
At such prohibitively high costs, industries cut output. Petrochemical facilities across Southeast Asia shut down, regional flights are cancelled, shipping activity falls, and fuel is rationed. The economic damage will be severe. Several economies may slip into recession. Energy-intensive industries, still recovering from the 2022 energy crunch, will be hit again. Inflation will rise as energy and raw material costs increase. Many people will become poorer and angrier.
The Reckoning
Once the worst of the war’s fallout for energy supplies has passed, governments will seek structural change to avoid future crises. Countries that rely heavily on fossil fuel imports—especially those dependent on supplies from the Gulf region—will have to ask themselves how and with what speed they can reduce that dependence.
Consider a few major examples across Asia and Europe. Japan is one of the world’s biggest importers of LNG, and it buys most of that fuel from Qatar—the world’s largest exporter. Qatar’s main LNG production site at Ras Laffan, however, was extensively damaged by an Iranian attack in March. Production and exports have ceased, and Qatar says repairs could take as long as five years. This means Japan must find ways to manage not only a short-term supply disruption, but also a long-term transformation of its energy landscape.
Officials in Tokyo are therefore considering the return of nearly all of the country’s more than 30 operable nuclear power stations—currently 15 nuclear reactors are in full operation. That push would require overcoming legal hurdles and public opposition, given the strength of anti-nuclear sentiment. Japan, after all, is the only country to have suffered both atomic bomb attacks, in 1945, and reactor meltdowns, in 2011. Utilities would also have to restart units that have been mothballed for 15 years. Still, Japan will likely accelerate nuclear restarts, and the government may use the current momentum to initiate new builds.
Restart applications for 3 additional reactors have received initial approval from Japan’s Nuclear Regulation Authority, while 6 more are under review. 8 reactors have not yet filed restart applications. The government will likely try to accelerate existing reviews and encourage more utilities to file. At the same time, officials will seek to diversify oil and gas supply sources—probably allowing existing contracts with Qatar to expire while pursuing new ones with alternative producers in Australia, Canada, and the United States.
The situation is even worse in Southeast Asia, where governments are again likely to be priced out of the market by richer countries in Northeast Asia and Europe—as happened after the 2022 energy shock. Pakistan, which until recently received all of its LNG from Qatar, will probably face power cuts and may burn more coal. In addition, it will likely increase imports of Chinese renewable technology to reduce its acute LNG vulnerability.
India presents an even larger dilemma. As the world’s fastest-growing consumer of imported fossil fuels, India has already seen the price spike in LNG and supply disruptions translate into fertilizer shortages—since LNG is used to make fertilizer—as well as shortages of cooking gas. To avoid future disruptions, New Delhi faces a series of difficult choices. It can invest in diversifying its oil and gas supplies; East Africa, especially Mozambique and Tanzania, has major LNG potential and is relatively close to India. It may also follow China’s approach of increasing coal use while trying to electrify quickly.
Yet each option carries political and economic costs. New LNG investments would require billions of dollars, take years to develop, and create new import dependencies. Burning more coal would worsen pollution in a region already plagued by severe smog. Accelerating electrification, meanwhile, would increase dependence on Chinese imports—at least in the near term.
India will likely pursue some combination of these approaches, diversifying imports away from the Middle East while building more renewables. Most importantly, however, it is likely to increase coal-fired power output, since this offers the cheapest short-term solution while also supporting domestic employment.
In Europe, where industry is facing its second gas crunch in five years, governments are scrambling to prevent a third crunch in the future. Some politicians have argued that the EU should resume oil and gas imports from Russia, even as Moscow continues its invasion of Ukraine and its asymmetric warfare across Europe. A large-scale return of Russian gas remains unlikely, since most European countries have found new sources of supply. A resumption of Russian oil imports, however, is more plausible if and when sanctions ease.
The larger challenge, however, is Europe’s continued reliance on fossil fuel imports, especially gas. Germany, the region’s biggest gas consumer, plans to expand its gas-fired power capacity by 8 to 12 gigawatts over the next five years. The idea was that these plants would come online in time to benefit from an expected global gas glut that would push prices down in the years ahead. To bridge the gap, Berlin has offered an industrial power price cap to energy-intensive industries—with EU approval—extending until 2028. After that, lower market prices in a world of gas abundance were supposed to help German industry compete freely again. Given the scale of the global gas disruption, and the fact that some of this future gas was contracted from Qatar, that plan now looks unrealistic.
A review of Germany’s gas expansion strategy therefore looks unavoidable. Germany has several options, though all are politically difficult. Berlin could double down on renewables and storage in the hope that technological advances make additional fossil fuel imports unnecessary. It could also delay its exit from coal-fired generation, currently planned for 2038, and activate its existing 6.5 gigawatts of coal reserves. Germany may even reconsider nuclear power, despite having phased out its last reactors in 2023.
Each of these paths comes with political costs. Expanding green power remains unpopular with parts of the influential energy-intensive industries, while extending coal use or restarting nuclear power is divisive with the broader public. The most likely outcome is that Germany activates its existing coal-fired reserves for use in the coming years while doubling down on electrification. This may also be accompanied by a push to invest in new small modular reactor (SMR) technology, given the associated opportunities for job creation. Building conventional reactors in Germany, however, remains unlikely, as the country no longer has the necessary expertise.
The UK will drill again
Britain also faces stark choices, given that it has Europe’s greatest reliance on Qatari LNG, and Qatar owns one of the UK’s LNG import facilities.
The most obvious response would be to permit renewed offshore oil and gas drilling. A return to past production levels is impossible because mature fields are depleted, but some untapped reserves remain, especially off Scotland’s north coast. Developing these resources could reduce the United Kingdoms’ import dependence and create new jobs. Though unpopular on the left, including among significant parts of the ruling Labour Party, this outcome appears likely given the advanced talks with developers and the policy’s appeal to conservative and right-leaning voters.
There are also growing calls for the UK to increase investment in nuclear power. Yet additional conventional power stations are unlikely, given the costs and delays associated with existing projects. Hinkley Point C has already been under construction for almost a decade and is expected to cost more than £50 billion ($67 billion) by the time it is completed in the 2030s. The most likely outcome, therefore, is further investment in sectors where the UK already has a comparative advantage: offshore wind, domestic gas, and the emerging small modular reactor (SMR) industry.
A Diminished Role for the Middle East
Most of these options will raise supply-chain and energy-transition costs, at least in the short to medium term. In other words, higher energy costs for longer periods of time. Even if only some of these measures are implemented, one broader consequence is likely to follow, since they all share a common feature: a reduced role for the Middle East in supplying the global market, much as Russia’s role has diminished since 2022.
There is ample precedent for this. The OPEC embargo of the 1970s triggered offshore oil and gas drilling booms on the U.S. Gulf Coast and in Europe’s North Sea. The first U.S. shale boom, roughly from 2008 to 2015, and the slightly later Australian LNG boom, roughly from 2012 to 2017, were both partly responses to Middle Eastern supply restraint.
Changes in energy technology are also closely linked to price shocks—alongside climate and pollution concerns. Some of the earliest green energy policy pushes followed supply disruptions, including in Europe after the first Russian gas pipeline losses during the cold winter of 2008 to 2009. Around the same time, China began its push for electric vehicles after years of relentless oil price increases. Crude prices rose from little more than $25 per barrel in the early 2000s to almost $150 per barrel just before the financial crisis of 2008. The EU again accelerated its green energy and EV push in 2022 after losing most Russian oil and gas imports.
The same dynamic will unfold again in the wake of the Iran war. New supply chains will be established and new technologies will advance. The shift will be irreversible, even if the war ends quickly.
