Soaring prices, fuel shortages, and possibly even blackouts: Iran’s recent attacks on Gulf energy infrastructure show that the effects of the conflict will continue to haunt us for months to come.
Overnight, missiles fired from Iran rained down on Qatar’s Ras Laffan plant, a mammoth plant that produces about a fifth of the world’s supply of liquefied natural gas (LNG).
Many saw the attack as a turning point in the war, a sign that the war would no longer be over in weeks, as Donald Trump had promised, but would take months.
It also marks a significant escalation in the conflict: Iran has so far avoided direct attacks on energy infrastructure.
Before 2022, Qatar was the UK’s largest LNG supplier, accounting for 40% of its total imports at its peak in 2011. Liquefied natural gas is the main fuel in the UK, which still relies on natural gas for 35% of its energy.
Imports have fallen sharply in recent years as the UK turns to alternative supplies from the US, with Qatari LNG now accounting for only around 2% of imports.
But that doesn’t mean the UK will be immune to the crisis. Natural gas is a globally traded commodity, and shocks in one region can affect the entire market.
European natural gas prices soared from €55 per megawatt hour (MWh) to €72 per megawatt hour (MWh) when markets opened on Thursday, rising sharply even before the scale of the losses was known. Oil prices also rose sharply – up about 8% to $116 a barrel. Just a few weeks ago, it was trading at $65.
Crisis is imminent
Ras Laffan’s owner, Qatar Energy, said the plant had suffered “extensive” damage, suggesting it could be out of action for months.
Analysts say the impact could be catastrophic. Natasha Fielding, head of gas and LNG at commodities specialist Argus Media, said long-term damage could lead to prices reaching energy crisis levels in 2022.
“If there is long-term damage to LNG facilities (which we still don’t know), it would not be surprising to see European LNG prices rise. [benchmark] Push higher,” she said.
“They could be closer to the eye-popping heights of an energy crisis in 2022.”
Seb Kennedy, founder of Energy Flux, a natural gas and LNG analytics platform, takes a more pessimistic view.
“The scale of the rapidly escalating attacks and damage to critical energy infrastructure is unparalleled in history,” he said.
“This escalating conflict is sowing the seeds of an energy crisis that will dwarf the events of 2021-22.”
What does this mean for the UK? In 2022, typical annual home energy bills soared from £1,277 to £3,549 in just a few months.
Households never paid that price because the government stepped in to cap the average bill at £2,500, but the cost was paid for through taxes – an effect that has been helping to undermine the UK economy ever since.
We may be heading in that direction again. In fact, Ashley Kelty of investment bank Panmure Liberum said the current crisis means we could see shortages and even power outages.
“There is a huge risk of shortages – northwest Europe could run out of gas as storage is very limited, and competition from Asia means LNG cargoes will at least be diverted. [where heavy industry is asked to shut down] Even summer power outages are no longer a fantasy. “
Prices for all forms of energy – electricity, gas, petrol, diesel and jet fuel – will rise significantly, and the impact on the UK will be far-reaching.
Greg Newman, founder and chief executive of Onyx Capital, a major London-based oil and energy derivatives trader, predicts forecourt diesel prices could hit £2 a liter as early as next month.
He said: “What worries the UK is that European oil prices, which previously lagged behind those in the Middle East and Asia, are now actively catching up and have a long way to go before they are in line with prices in other parts of the world.”
According to the RAC, UK diesel prices have risen by more than 20p a liter to 162.66p since the conflict began, while petrol prices have risen by almost 10p to 142.62p a liter.
Mr Newman said: “We are very confident that diesel prices will exceed £2 a liter next month.”
Iran sparks chaos
What is Iran’s strategy? Why would it attack facilities owned by neighboring countries that were not involved in the U.S.-Israeli attacks?
It’s worth remembering that this war was not started by Iran, nor was it an attack on energy infrastructure.
During the first week of Operation Epic Fury, the United States and Israel focused on air defense, missile silos and leadership.
To avoid a global energy crisis, energy infrastructure has been left largely untouched, which has been an obvious risk from the start.
That all changed on March 7 when the Israeli air force attacked multiple fuel storage facilities and depots on the outskirts of Tehran.
This week, Israel shifted its focus to targeting oil and gas production facilities, not just storage facilities.
These include South Pars, the world’s largest natural gas field, as well as the Asaluye refinery and gas processing plant. This paralyzed 20% of Iran’s natural gas processing capacity and caused widespread power outages in Tehran and central Iran. About 90% of Iran’s electricity comes from natural gas power plants.
With Israel and the United States well protected from retaliation, Iran’s best and perhaps only hope of putting pressure on its enemies is to disrupt global energy supplies.
It targeted facilities in the region, but what it really wanted to disrupt were five key locations, said Aditya Saraswat, senior vice president at global energy analyst Rystad Energy.
Qatar’s Ras Laffan LNG plant tops the list given its importance in global gas supplies. The strike in Iran knocked out LNG “trains” or processing lines that supply Europe, Japan, South Korea and China under long-term contracts.
Likewise, Saudi Arabia’s advanced Samref refinery has faced a series of attacks, the latest on Thursday, which so far have caused no apparent damage. It processes 402,000 barrels of oil per day into gasoline, diesel, jet fuel and many other products.
“This is truly a worst-case scenario for global energy and fuel markets. As usual, the poorest in society bear the brunt of the economic impact,” Mr Kennedy said.
“Many Asian economies have already introduced export controls and rationing. But the scale of supply losses exceeds the ability of governments to manage demand destruction in an orderly manner.”
However, the Middle East produces more than just gas and oil. Iran has also targeted Saudi Arabia’s Jubail isocyanate production facility, which produces polyurethane needed for a variety of plastics used in industries ranging from construction to automobiles.
Also under attack was Qatar’s Mesaieed petrochemical complex, 25 miles south of Doha, which converts natural gas and oil into key chemicals such as polyethylene, the basis for thousands of other plastic products.
The United Arab Emirates’ Al Hosn sulfur plant was also a target. The plant is located above the Shah gas field, whose “sour” gas is a major source of sulfur used in the global production of fertilizers and sulfuric acid, perhaps the world’s most widely used chemical.
“The breadth of risks to fuels, chemicals, LNG and fertilizer inputs makes this moment qualitatively different from previous Gulf tensions,” Mr Saraswat said.
“Even if the military war ends immediately, the energy situation will get worse before it gets better,” Mr Kennedy said.
Energy pressure is growing and the UK government is under increasing pressure to step in and help struggling households and businesses. Chancellor Rachel Reeves said “anything is possible”. But with public finances still reeling from the last round of support in 2022, there are practical limits on how far ministers can go.
Whatever happens, energy costs will be a key issue in the upcoming local and regional elections, including the Scottish and Welsh Assembly elections, which will be crucial in deciding whether Sir Keir Starmer still has a future as prime minister.
Our energy security has been compromised. While it’s not his fault, it may be Sir Kell who pays the price.
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