A Global Energy Security Shock

The conflict in Iran, which has now spread across much of the Middle East, is roiling energy markets. Not only has Iran in effect closed the Straits of Hormuz but oil and natural gas production across the region is coming to a standstill.

Qatar, the world’s second largest exporter of liquified natural gas (LNG), has halted LNG production following Iranian drone strikes leaving a yawning gulf in global supply. Some 70% of Qatari LNG is exported to Asia and 25% to Europe. The conflict and its impact on global energy flows has sent natural gas prices across Asia and Europe soaring. The European LNG benchmark has jumped more than 70% and the Northeast Asian benchmark has also jumped, hitting a one-year high.

For energy markets, there are echoes of the impact of Russia’s full-scale invasion of Ukraine in 2022. That shock ushered in abrupt reevaluation of and re-embrace of the importance of energy security. And the same may be happening today. Just how long this conflict lasts and how disruptive it becomes are frightening questions with the war in Ukraine now in its 5th horrifying year.

Reinforcing the Value of Coal

As we saw in 2022, when energy security reemerges as the critical consideration, policymakers and markets turn to coal. To that point, Javier Blas, Bloomberg’s commodity and energy columnist, tweeted, “Side comment post-Qatar LNG shutdown: Asian countries got a huge reminder today of the advantages of coal for baseload electricity. Maybe also about the advantages of renewables. But a lot more about coal. Today’s event will have important policy implications.”

He’s absolutely right. Gas markets have again and again proven deeply susceptible to volatility. Europe’s shift away from coal to overreliance on gas markets left it extraordinarily vulnerable in 2022 and facing another price shock today. Don’t expect Asian nations to make the same mistake. This conflict and its impact on LNG supplies could well be a nail in the coffin for any pivot away from coal to natural gas.

As 2022 taught us – and this alarming week is reinforcing – there is no replacement for fuel diversity and energy security. And when energy security is at a premium, it’s coal that underpins it.

That’s a lesson our allies and trade partners are relearning and its one the U.S. must embrace as well. With the United States now the world’s largest LNG exporter and global gas shortages a mounting concern, what impact this energy crisis will have on the U.S. gas market will be worth closely monitoring.

Rising domestic natural gas prices are already a leading driver of electricity price inflation. A deeply disruptive war in the Middle East with widespread impacts on energy trade flows could very well drive prices even higher. Dispatchable fuel diversity and the optionality underpinned by the U.S. coal fleet and U.S. coal production are the nation’s electricity price shock absorber. They could very well need to come to the rescue once again.