The strategic importance of the Strait of Hormuz is immense, as about 25 to 30 percent of global oil and 20 percent of liquefied natural gas pass through this narrow waterway. According to estimates from the US Energy Information Administration, about a fifth of the world's oil—around 20 million barrels each day—flows through the strait. Currently, shipments of oil and gas through the Strait of Hormuz are at a standstill due to Iranian threats to tankers, creating a critical bottleneck for global energy supplies.
Immediate market impacts have been severe, with international prices for LNG jumping more than 50 percent. The disruption has produced the largest disruption to the global oil market in its history, according to the International Energy Agency, as the standstill combines with damage to regional infrastructure from the strikes. This has sent global oil and gas markets spiraling, with attention focused on the strait through which enormous volumes of crude oil and liquefied natural gas flow.
The shock is global, yet asymmetric, as energy importers are more exposed than exporters, poorer countries more than richer ones, and those with meager buffers more than those with ample reserves. The war in the Middle East is upending lives and livelihoods in the region and beyond, with the crisis extending far beyond the immediate conflict zone.
Regionally, large energy importers in Asia and Europe are bearing the brunt of higher fuel and input costs. Simultaneously, economies heavily dependent on oil imports in Africa and Asia are finding it increasingly hard to access the supplies they need, even at inflated prices.
Broader strains are emerging, as parts of the Middle East, Africa, Asia-Pacific, and Latin America face the added strain of higher food and fertilizer prices and tighter financial conditions. Low-income countries are especially at risk of food insecurity; some may need more external support—even as such assistance has been declining.
China, the world's largest buyer of oil, is also feeling the strain from the oil shortage. However, China sits in a better position than its neighbours, after years of statecraft that have prepared it for a global energy crisis.
China's oil sources are dominated by Gulf countries and Russia, with barrels from Saudi Arabia and Iran accounting for more than 10% of its imports each, according to the US Energy Information Administration. Russian oil accounts for nearly a fifth of China's energy imports, making Moscow by far Beijing's biggest oil supplier, despite sanctions from the US and Europe. China uses an estimated 15 to 16 million barrels of oil daily, according to various market analysts.
China's domestic energy landscape is anchored by coal, which is the dominant source of power for most of its electricity and is available in abundance locally. China is the world's largest coal producer, accounting for more than half of global production.
Contradictions exist in the global oil market, as current reports indicate high prices due to supply disruptions, while other data show low prices from weak demand. The world’s demand for oil is growing at its slowest pace since the height of the Covid-19 pandemic, causing global market prices to slump to three year-lows, the International Energy Agency has said, with a barrel of crude already slumped below $70 to lows not seen since the global economy began recovering from the pandemic. Global oil demand increased by 800,000 barrels a day in the first half of the year, equivalent to just over a third of the growth recorded in the same period last year and the smallest increase since 2020.
Oversupply risks are contributing to the low-price scenario, as overall demand this year is expected to reach 103m barrels a day, while in August, the world’s oil-producing countries produced 103.5mb/d. This oversupply risks creating a glut of oil in the market.
Factors behind the slow demand include the weakening of the Chinese economy, as the slow growth in global oil demand was attributed to this, with demand for oil in China decreasing for four months in a row this year. Weak economic growth in the world’s advanced economies could result in global oil demand this year being almost 2mb/d below pre-pandemic levels.
China's energy transition is accelerating this trend, as a surge in electric vehicle sales in China has reduced the country’s demand for road fuels. The government’s rollout of a vast national high-speed rail network has begun to reduce growth in domestic air travel.
Future projections indicate a decline in fossil fuels, as the IEA has predicted that the world’s demand for oil, gas and coal will begin to decline this decade in 'the beginning of the end' of the fossil fuel era. The IEA has estimated that China’s switch to EVs will outpace that in the west by the end of the decade, with almost one in three cars on Chinese roads being electric by 2030, compared with almost one in five in the US and EU.
The long-term demand outlook suggests a plateau, as oil demand could reach highs of 105.7mb/d by 2028, but it would probably plateau at this level before beginning a slow decline. The findings stand in contrast to forecasts produced by Opec+, as the oil cartel also reduced its predictions for oil demand this year, but they remain more than double the IEA’s forecasts.
Key unknowns remain, including the exact current status of oil and gas shipments through the Strait of Hormuz, such as whether they are completely halted, partially disrupted, or resuming. It is also unclear what specific measures are being taken by governments or international bodies to address the energy market disruptions or low demand, and how the conflicting reports on oil prices and demand are reconciled in terms of timeline or underlying data sources. Additionally, the immediate impact on global inflation and economic stability has not been fully assessed, and how low-income countries are specifically coping with the combined strain of higher food and fertilizer prices and tighter financial conditions remains uncertain.
Further unknowns involve the broader economic repercussions, as the impact on global inflation and the coping mechanisms of low-income countries are not yet fully understood.
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