CoverStory:WarintheGulfTriggersGlobalEnergyShock

The war in the Middle East, which is entering its fourth week, has opened a dangerous new front: the region’s energy system.

What began as a fast-moving military confrontation has escalated into direct strikes on oil and gas installations across the Gulf, damaging capacity in a region that supplies roughly a quarter of the world’s oil and gas.

The fallout is already reverberating beyond the battlefield. Oil and gas prices have rocketed in volatile trading, rippling through equities, commodities, currencies, inflation expectations and supply chains. What is unfolding is no longer simply a regional security crisis, but a broad economic shock with global consequences.

A major pressure point is the Strait of Hormuz, the narrow waterway that in the run up to the conflict carried nearly 30% of global seaborne oil trade and about 20% of liquefied natural gas (LNG) flows, along with substantial volumes of fertilizers, methanol and metals. As attacks intensified and the risks to shipping mounted, traffic through the strait virtually ground to a halt, as flows of oil, gas and other commodities stalled with few viable alternatives available. The resulting disruption to supplies has jolted markets and raised the specter of a stagflationary shock.

The latest panic was triggered by a direct strike on the heart of the global LNG trade. On March 18, Iranian missiles hit multiple LNG facilities at Ras Laffan Industrial City operated by Qatar Energy, the world’s largest LNG producer, setting off large fires and causing extensive damage. The attack followed an earlier missile strike that damaged facilities at the Pearl gas-to-liquids project. Companies involved said the latest assault cut Qatar’s LNG export capacity by 17%, implying annual revenue losses of about $20 billion and a repair timeline of three to five years. Supplies to China, South Korea, Italy and Belgium are expected to be affected.

Tehran cast the attack as retaliation for an Israeli strike earlier in the day on Iran’s South Pars gas field, part of the world’s largest gas field, whose extension into Qatar is known as the North Field. South Pars supplies nearly 70% of Iran’s domestic gas demand, and Iranian officials described the Israeli bombing as a direct hit on the country’s energy and economic lifeline.

Iran then widened its warning, declaring oil facilities in Saudi Arabia, the United Arab Emirates and Qatar “legitimate and primary” retaliation targets. The threat quickly materialized. On March 19, Iranian drones struck Saudi Arabia’s Samref refinery and Riyadh refinery, the UAE’s Bab oil field and Habshan gas facilities, and two of Kuwait Petroleum Corp.’s three refineries.

Liquefied natural gas production facilities in Ras Laffan Industrial City, Qatar, on March 3, 2026

The conflict has now tipped into an energy war, with critical infrastructure emerging as a central target. On March 19, Brent crude futures jumped as much as 6.6% intraday to $112 a barrel, more than 40% above prewar levels. Europe’s benchmark TTF April LNG futures rose to 61 euros per megawatt-hour, while Asia’s JKM spot LNG benchmark climbed to $22.35 per million British thermal units, up 91% and 108%, respectively, from before the war.

Rising energy prices are already feeding into the global economy, with stagflation emerging as the primary risk. Global energy consultancy Wood Mackenzie estimates that if annual average oil prices reach $90 per barrel, global GDP growth could fall from 2.5% to 1.9%; at $125 per barrel, growth could slow to 1.3%.

“The conflict in the Middle East is having significant impacts on global oil and gas markets, with major implications for energy security, energy affordability and the global economy for oil,” said Fatih Birol, executive director of the International Energy Agency.

A global supply shock

The energy shock is rapidly spreading through global supply chains. In the Middle East, oil exports from eight countries including Saudi Arabia, Kuwait and the UAE fell about 60% in early March from February averages.

Goldman Sachs estimates that if the war continues into April and disrupts the Strait of Hormuz for two months, the economies of Qatar and Kuwait could each contract by 14%, while the UAE could shrink by 5% and Saudi Arabia by 3%.

Across the Gulf, refiners are cutting utilization, while Asian refiners are reducing runs amid crude shortages. The region’s heavy reliance on Middle Eastern supply leaves few alternatives, pushing average run cuts in Asia to around 20%.

Countries are scrambling to secure replacement barrels, including from Russia. India alone purchased roughly 30 million barrels within a week after U.S. sanctions were eased to soften the energy crunch.

Shortages are spreading across fuel markets, prompting subsidies, price caps and demand curbs in developing economies. Airlines are trimming schedules as jet fuel costs rise and supply tightens.

The shock is also spilling into fertilizer and food markets: disruptions to shipments of urea, phosphates and sulfur threaten crop yields, with potential global food price increases of 10% to 30%.

To cushion the blow, the International Energy Agency on March 11 announced the largest coordinated release of strategic petroleum reserves on record, totaling 400 million barrels. Asia-Pacific and Europe each pledged more than 100 million barrels, while the U.S. will contribute more than 170 million barrels, supplemented by an additional 30 million barrels from higher domestic output.

Even so, the feedback into major economies is already visible. Strong overseas demand for U.S. LNG has pushed up domestic gasoline and Henry Hub natural gas prices — key inflation gauges — by about 30% and 9%, respectively, since the conflict escalated.

Sustained oil prices above $100 a barrel would be difficult for Washington to tolerate, said Liao Na, general manager of GL Consulting, noting that rising inflation has already triggered a sell-off in equities, with technology stocks under particular pressure amid concerns the conflict could puncture the AI-driven rally.

Policy options remain limited. While U.S. officials signaled a willingness to ease sanctions on Russian — and potentially Iranian — oil, such steps, alongside reserve releases, amount to only partial fixes, said Wang Haibin of Sinochem Energy. Roughly 20 million barrels pass through the Strait of Hormuz each day, volumes that are hard to replace through alternative routes. “If the Hormuz disruption persists, the global oil shortfall will deepen over time, not ease,” Wang warned.

The trajectory of global energy markets — and the broader economy — hinges on the severity and duration of the war. Key risks include potential attacks on Iran’s Kharg Island, which handles up to 94% of the country’s crude exports, Wang said.

Asia’s economic pain

“If the Middle East is the epicenter of the energy tsunami, then Asia is one of its biggest victims,” said Xing Ziqiang, Morgan Stanley’s chief China economist, at a March 16 briefing.

The impact has been swift and acute, particularly in more vulnerable economies. Confronted with fuel shortages and surging prices, governments are taking emergency measures to curb demand and stabilize supply. Bangladesh has closed universities early to ease pressure on its power grid, while the Philippines is considering shorter public-sector working hours.

Economies dependent on energy imports across Southeast Asia, along with India and Australia, are under particular strain, with limited alternatives, said Sushant Gupta of Wood Mackenzie. India, for example, holds among the lowest crude inventories in Asia and relies on the Middle East for about 50% of its imports. Australia’s position is even tighter, with petroleum stocks able to cover only 25 to 30 days — far below the International Energy Agency’s 90-day benchmark.

Motorists queue to refuel their vehicles at a gas station in the Wellawatte district of Colombo, Sri Lanka, on March 16, 2026. Photo: VCG

From Pakistan to Sri Lanka, governments are scrambling to manage dwindling supplies and protect consumers. Even developed nations such as Japan and South Korea, both heavily dependent on energy imports, have resorted to subsidies and price caps.

In Vietnam, a shortage of imported jet fuel has forced airlines to scale back operations and reduce flights. According to Reuters, the country depends on imports for more than two-thirds of its jet fuel, with 60% of that coming from China and Thailand. Compounding the problem, Beijing banned jet fuel exports after the war began, according to a source close to China National Aviation Fuel Group.

Technology-driven economies including Taiwan, South Korea and Japan are particularly vulnerable due to their heavy reliance on imported LNG for power generation. Xing warned that prolonged disruptions could trigger a “tsunami-like” break in industrial supply chains.

Green transition rethink

The crisis has exposed the world’s continued reliance on fossil fuels and is forcing a rethink about the pace and pathway of the energy transition.

“Peace and stability have become the top concerns,” said Angela Wilkinson, secretary general and CEO of the World Energy Council, as policymakers seek to rebalance the “energy trilemma” of security, affordability and sustainability.

A more pragmatic shift is underway. “After the onset of the 2022 Russia-Ukraine conflict, the world began to rethink energy security and diversification — this Gulf crisis has intensified that process,” said Allen Wang of Wood Mackenzie. Buyers are relearning that diversification itself is a form of security, said Bob Brackett of Bernstein Research, pointing to a likely “long cycle” of rebuilding more redundant, less efficient but more resilient supply chains.

That reassessment is reshaping power strategies. Japan is moving to expand nuclear power alongside renewables after scaling it back following the 2011 Fukushima disaster. Europe, long committed to phasing out nuclear power and coal, is also reconsidering. Ursula von der Leyen, the European Commission president, called the region’s retreat from nuclear power a “strategic mistake” and outlined plans to develop small modular reactors. Even Germany is reexamining its nuclear exit.

While the crisis provides a powerful incentive to accelerate the move to renewables, it has also reinforced the indispensable role of fossil fuels as a reliable, high-density energy source. Several countries are turning back to coal to offset reduced LNG supply: the Philippines has signaled higher coal use; South Korea is lifting caps on coal-fired generation; and India says it is preparing for “unprecedented” coal demand by 2026.

Morgan Stanley analyst Zhang Lei estimates that if Qatar’s LNG exports remain constrained, Japan, South Korea and Taiwan could increase monthly thermal coal imports by 1.5 million to 2 million tons, an 8% to 10% rise, while South Asian demand could grow by another 1 million to 1.5 million tons.

The result is a dual-track adjustment. High fossil fuel prices are accelerating investment in renewables and electric vehicles, while underscoring the need for a diversified system in which oil and gas continue to provide a critical backstop. As Chen Weidong, former chief researcher at the China National Offshore Oil Corporation Research Institute, put it, the conflict is a reminder that oil and gas remain indispensable.

China’s strategic resilience

Amid the global turmoil, China has shown “strong resilience,” according to Chen. As the world's largest energy producer and consumer, its energy self-sufficiency rate stands at 83.1%, official data showed.

Coal is the bedrock of its energy security, with a self-sufficiency rate over 90%. While China is the world’s top importer of crude oil and natural gas, these fuels only account for 17% and 9% of its total energy consumption, respectively.

Beijing has long prepared for such a crisis. Through strategic planning, investment, diversified import sources, and building massive reserves, it has built a robust supply security framework. “China mainly faces a price risk, not a supply risk,” said Liao.

Wood Mackenzie estimates China holds nearly 1.5 billion barrels of crude oil in inventory.

In addition to the Middle East, China’s oil and gas imports come from sources across Russia, Australia, the U.S. and Africa. As a result, many analysts say the impact of the Hormuz blockade on China’s energy supply is far more limited compared with other Asian nations.

Furthermore, the rapid growth of electric vehicles is steadily reducing China’s gasoline consumption. And as the world’s largest producer of green electricity, the crisis is likely to further accelerate the development of its “new three” industries: solar panels, wind turbines and electric vehicles.

“China’s energy transition is based on a foundation of energy security,” said Li Xueyu, deputy director at Peking University's Energy Research Institute. It is building a new type of power system that combines large-scale renewable development with the stability provided by its existing coal fleet, all while preparing for the higher costs that this transition will entail.

Zou Xiaotong and Wen Simin contributed to the story

Contact reporter Han Wei (weihan@caixin.com)