The Reality of War in the Middle East

A couple of weeks ago, while I was passing through Dubai, I experienced a moment that really brought home the impact of war. I was returning from a peaceful stroll at sunset along Dubai Creek when my Uber driver abruptly exclaimed, “Hey, look at the sky!” Through the windshield, we saw UAE’s air defense system lighting up the sky in orange, intercepting several drones. One of those drones later crashed near the U.S. consulate, sparking a fire. Thankfully, it was swiftly put out, and there were no casualties.

It’s a grim reality to say that wars in the Middle East have essentially become routine. Drones and missiles zip across the sky, most getting intercepted, yet everyday life for many seems unchanged. In Dubai, I saw impressive resilience—people refusing to succumb to the ever-looming threat of danger growing day by day.

The resilience on display in Dubai, where life persists even amid ongoing attacks, is now facing a more significant challenge with the global energy supply chain under stress.

Operation Epic Fury is underway, with repercussions that will extend far beyond the local region, impacting the entire globe. Iran, known for its substantial oil production and reserves, finds itself in a position of limited buyers due to decades of sanctions, primarily selling to China at deeply reduced prices.

If a regime change were to occur in Iran, China might face a significant loss in its discounted oil supply. That risk is compounded by potential political shifts in Venezuela, which is another crucial source of cheap imports for China.

The Strait of Hormuz remains largely inaccessible, cutting off up to 20% of global oil and liquefied natural gas supplies from major suppliers like Saudi Arabia, Qatar, and Kuwait. This disruption is already beginning to influence energy prices worldwide.

A Critical Waterway

Acting as a key link between the Arabian Gulf and the Gulf of Oman, the Strait of Hormuz is critically important. Astonishingly, around 20% of the world’s petroleum products traverse this strait, which is pivotal for both the global economy and the economies of Gulf nations.

For perspective, 38% of oil flowing through the strait comes from Saudi Arabia, with projections showing that by 2025, oil revenue will account for 53.4% of the government’s income. Moreover, Qatar relies entirely on this strait to export 9.3 billion cubic feet of liquefied natural gas daily, comprising the bulk of the LNG passing through.

Iran has been targeting energy supply chains in the Gulf, recognizing that these nations are heavily dependent on oil and gas revenues. Unable to carry out attacks on the U.S. mainland, Iran focuses on Gulf states that back U.S. military presence.

The strait’s closure poses risks extending far beyond local effects. As exports to Asia, particularly countries like China, South Korea, Japan, India, and Taiwan are expected to soar to over 83% in 2024, the potential rise in energy costs threatens to inflate prices across various sectors due to the vast manufacturing happening in that region.

Given that China hasn’t diversified its oil supply enough away from Iranian sources, it’s applying pressure on Iran to maintain tanker access. Even without a blockade, the strait’s closure could become a substantial global market issue, as shippers hesitate due to risks of asset loss or heightened insurance costs.

Furthermore, if Yemen’s Houthis decide to start blocking the Bab al-Mandeb Strait in support of Iran, the resulting increase in shipping costs could have broader implications for goods manufactured in East Asia.

Targeting Energy Infrastructure

Iran’s strategy seems to include open attacks on Gulf states aligned with the U.S., expanding to include Azerbaijan and even Cyprus. The country acknowledges the significance of the energy sector in the regional economy, especially regarding energy infrastructure.

Recent attacks on Qatari infrastructure have jeopardized around 17% of its liquefied natural gas export capacity, putting pressure on the economies of the UAE, Bahrain, and Saudi Arabia, with the Shah gas field also affected.

If Iran continues its campaign against Gulf energy assets while depleting their defensive capabilities through relentless attacks, these states may face heightened economic and military vulnerabilities.

China’s Reliance on Iranian Oil

China relies on imports for almost all of Iran’s oil, with over 80% of that oil being exported. The strategy is straightforward: they procure oil from heavily sanctioned nations that have limited customer bases, benefiting from significant discounts—much like with Venezuela, though to a lesser extent.

Combined, Iran and Venezuela typically account for about 17% of China’s seaborne imports. If conflict escalates or if the energy infrastructure on Kharg Island—responsible for about 90% of Iran’s oil exports—is compromised, China could see a near 20% drop in its seaborne imports. A shift in regime in Iran favoring the West or military action affecting Iran’s discounted oil exports to China would force a significant diversification of China’s offshore oil supply.

What It All Means

After enduring an evacuation flight to San Francisco, a drive to Los Angeles, and finally settling back in Arizona, I find some comfort in writing this. Operation Epic Fury has shaken the Strait of Hormuz, led to numerous attacks on Gulf energy infrastructure, and caused a sharp uptick in global energy prices.

China might lose up to 20% of its discounted offshore oil imports, with Asian economies now facing rising manufacturing costs that are likely to trickle down to global consumers. The resilience witnessed in Dubai is now being put to an even tougher test as the global energy supply chain experiences strain. It appears that volatility in oil, LNG, and gasoline prices might just become our new normal, illustrating the deep interconnection of global energy security.