RPT-ROI-Iran war leaves deep, costly scar on Mideast energy: Bousso

By Ron Bousso

LONDON, March 19 (Reuters) - The Iran war has shattered the fragile coexistence among Gulf energy producers that long underpinned regional stability. Oil and gas markets will now carry a higher Middle East risk premium for years — if not decades.

Now in its third week, the conflict has pushed the Middle East’s vast energy infrastructure directly into the line of fire. Tehran has targeted dozens of energy installations across the region, striking at its neighbours’ - and the West’s - economic lifeline and signalling its reach far beyond the battlefield.

Most critically, Iran blocked the Strait of Hormuz, the region’s maritime gateway, for the first time in history. The move trapped roughly a fifth of the world’s oil and liquefied natural gas supplies, boosting crude oil above $100 a barrel - and delivering sticker shock at the pumps.

The shock has served as a stark reminder that, for all the talk of diversification and energy transition, the global economy remains acutely vulnerable to disruption in the Middle East.

It remains unclear how and when the conflict will be resolved. But barring a change of regime in Tehran that would fundamentally alter inter-regional relations, the war will leave deep and lasting scars on the world’s most important energy hub, reshaping trade flows, investment decisions and risk calculations for years to come.

THE LASTING HORMUZ EFFECT

The U.S. has so far struggled to build a naval coalition to escort vessels through the strait, underscoring the political and logistical complexity of safeguarding the chokepoint.

Iran has warned that transit will not return to pre-war conditions, signalling that even a ceasefire may not restore confidence overnight. Some form of international protection will thus likely be required long after the fighting ends.

While Israeli and U.S. strikes have severely degraded Iran’s conventional military capabilities, Tehran can disrupt merchant shipping without advanced hardware. Low-cost attacks - from mines and drones to fast boats - can force vessels to reroute or slow down.

Shipowners and insurers are likely to remain wary of the Gulf even after the strait is officially reopened, given the heightened risk of renewed Iranian attacks, pushing costs higher.

Convoys and enhanced security checks will also slow the flow of energy and goods, straining global supply chains and driving up logistical costs.

Rebuilding confidence will take time. Red Sea shipping offers a cautionary tale. Iran-backed Houthi forces waged a campaign against vessels in the wake of Israel's war in Gaza. Those attacks halted last October, yet traffic remains at only around 60% of pre-October 2023 levels.

Once a route is perceived as dangerous, the stigma outlasts the shooting.

A REGIONAL RETHINK

The war will also have profound and lasting consequences for the Middle East’s oil and gas industry itself.

For decades, the region’s petroleum giants largely avoided direct military confrontation, keeping energy flowing even as political rivalries simmered.

The Organization of the Petroleum Exporting Countries, which includes all of the major Gulf producers, successfully navigated repeated bouts of regional tension, from the 1990 Gulf War to the U.S.-led invasion of Iraq in 2003, without suffering sustained disruption to exports.

Saudi-Iranian tensions have played out through proxy wars in Yemen, Libya and elsewhere, but all parties were usually careful to avoid impacting energy flows.

The most serious exception came in 2019, when drone and missile strikes briefly halved Saudi output - an attack Riyadh and its Gulf allies blamed on Iran, though Tehran denied it and Yemen's Houthis claimed responsibility.

The Iran war has upended that long-standing calculus. Gulf producers are likely to reassess operations and accelerate efforts to reduce their dependence on the Strait of Hormuz.

Saudi Arabia, the world’s largest oil exporter, offers a case in point. During the 1980s Iran-Iraq war - when hundreds of tankers were sunk in the Gulf - the kingdom built a massive east-west pipeline to bypass Hormuz entirely. That infrastructure is now proving invaluable, allowing Riyadh to redirect a large share of its exports through the Red Sea port of Yanbu.

Saudi crude loadings at Yanbu are set to hit a record high this month, and Riyadh is likely to keep them elevated indefinitely, embedding a structural shift in regional trade flows.

Other producers will also seek to diversify export routes. Iraq may push to expand northern pipeline capacity through Turkey, while the United Arab Emirates could further boost flows from the Fujairah oil terminal, which sits outside the strait. Such projects are costly and politically fraught, but the war has underscored the high price of inaction.

Qatar, the world’s second-largest LNG producer, faces a far starker reality. Forced to shut down production and declare force majeure days after the war began, Doha has no realistic alternative export route - leaving it uniquely exposed to prolonged disruption at Hormuz.

THE LESSONS LEARNT

Importers, too, are likely to adjust their strategies by sourcing supplies from further afield, even if that means higher transportation costs and greater inefficiencies. Strategic stockpiling, diversification and redundancy - long viewed as expensive insurance - now look essential.

The upshot is structurally higher prices for consumers.

However the Iran war ends, buyers and consumers are unlikely to forget how quickly a vital artery of global energy trade was severed. That risk premium - once theoretical, now painfully real - will have to be factored into oil and gas prices indefinitely.

(The opinions expressed here are those of Ron Bousso, a columnist for Reuters.)

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