The head of the International Energy Agency (IEA) said an extraordinary thing last week.
Speaking at a media event in Australia, Fatih Birol said the energy crunch triggered by the US-Israel war on Iran is now bigger in scale than the two oil shocks of the 1970s and the 2022 gas crisis combined.
That’s hard to get your head around.
Birol said the effective closure of the Strait of Hormuz and attacks on energy facilities in the region had reduced global oil supplies by about 11 million barrels per day (bpd), more than double the combined shortfalls of the 1970s’ crises.
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Liquefied natural gas (LNG) supplies, meanwhile, had been reduced by about 140 billion cubic metres (bcm), compared with a shortfall of 75 bcm in the aftermath of Ukraine’s invasion by Russia in 2022.
There are, of course, caveats: we produce and consume far more oil and gas today than we did in the 1970s even with the uptake of renewables.
So a major disruption to supply nowadays – in terms of oil barrels lost – is always going to dwarf ones from the 1970s.
Also, the aforementioned shocks went on for a considerable duration. The hope is that things can be brought to some sort of resolution soon. But the off ramps are disappearing.
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Birol said he was moved to quantify the scale of the current crisis (at least put it in 1970s terms) as it was not being fully understood.
The 1970s oil price shocks toppled governments, led to recessions and precipitated dramatic shifts in monetary policy (interest rates were hiked to more than 16 per cent in the United States).
We’re definitely not at that stage yet.
Ironically, the second oil price shock of 1979 triggered the Iranian revolution.
While motorists have been hit by the current conflict, the oil price shocks of the 1970s led to a more precipitous rise in prices at the pump. In 1973, oil prices quadrupled in a matter of months, leading to a 40 per cent hike in petrol prices for motorists, way in excess of what we’re seeing now.
The 1970s shocks also led to fuel rationing in oil-consuming countries.
And wholesale gas prices, the main driver of domestic electricity costs here, haven’t risen as much as they did in 2022.
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They went from about 30 to 40 pence a therm to 800 pence shortly after the Russian invasion. In the past month, they have doubled from about 80 pence to 160 pence a therm, falling back a bit since.
“But the longer this latest crisis lingers on, and the longer wholesale prices remain elevated, the greater the chance that we could see gas and electricity bills go up in the second half of the year,” said Daragh Cassidy, head of communications at price comparison website Bonkers.
“But if the war were to come to an abrupt end shortly, there is still a small chance bills may not go up at all,” he added.
Comparisons with the 1970s are comparable in terms of the supply quantity hit only but not in terms of the economic fallout. Nonetheless, the current crisis is big and getting bigger by the day.
If Donald Trump’s cat-and-mouse comments about negotiations are merely a ruse to ready his side for some sort of ground invasion, the situation could get a whole lot worse.
And even if the conflict is brought to some sort of immediate conclusion, it will take several years to restore production at some of the facilities that have been hit.
Minister for Finance Simon Harris repeated Birol’s warning about the scale of the crisis this week, presumably to brace the public here for the incoming price shock.
“We’re in a world now where the scale of the energy crisis is greater than the world has ever seen, and that’s just a statement of fact,” Harris said.
The International Monetary Fund (IMF) warned that the average worker is facing the equivalent of a “large” and “sudden” income tax hike.
And this is before you consider the second-round effects of, say, higher food prices, a byproduct of higher energy and higher fertiliser costs.
Food price inflation in the Irish economy as a result of the Ukraine war peaked only last year (at 6.5 per cent in October).
By any rational calculation, Washington has scored a major own goal by attacking Iran.
Not only has it failed to persuade Iran to agree to dismantle its nuclear programme in the comprehensive way Washington demanded last yearhe US is now having to negotiate to reopen the Strait of Hormuz, which was never closed in the first place.
For Iran, oil trading at anything above $100 a barrel gives it leverage. And it is not just oil. The strait provides passage for chemicals, helium, metals and fertilisers among other key items.
Not for the first time, we’re learning anew about the interconnectedness of world trade and global supply chains and how geography affords Iran a unique ability to disrupt these chains.
