Iran war energy shock sparks global push to reduce fossil fuel dependence

Summary

• After COVID-19, Ukraine invasion, third energy crisis of the 2020s triggers reassessment of supply vulnerabilities
• Renewables, EV dominance insulates China from oil price shock
• Politicians in Japan, Europe and Taiwan seek nuclear power revival
• Renewable energy shift risks creating new dependency on China, EU lawmaker says

The energy shock from the Iran war has policymakers around the globe rethinking ways to reduce long-term dependence on oil and gas imports, with proposals to expand nuclear energy and renewables, grow strategic stockpiles and domestic production, and diversify foreign sources of supply.

Iran's closure of the vital Strait of Hormuz shipping lane, after the US and Israel attacked on 28 February, marks the third time this decade that an international energy shock has forced governments to reckon with the risks of a world dependent on the free flow of vast quantities of petroleum to fuel its economic engine. It has also stoked the view that the fossil fuel age must end, after pushback in recent years to ongoing efforts to mitigate climate change.

"The issue of energy security has never been as acute as now. Until a few weeks ago, markets took Gulf resources for granted. That will not be the case going forward," said Geoffrey Pyatt, who was assistant secretary of state for energy resources under Joe Biden and is now a senior managing director at US consultancy McLarty Associates.

The world's biggest energy consumer nations are now back at the drawing board: Europe last week unveiled new financial guarantees for atomic power after decades of closing nuclear plants. Other major importers are planning to source fuel from a broader array of suppliers to hedge their risk.

In a timely article about a potential blockage to Hormuz, a department within China's state planner, which shapes the country's economic strategy, said on the first day of the war that the country should accelerate its renewable energy transition, as well as expand its emergency reserves and source more energy from alternative suppliers.

"Not only China, but around the world," governments "will reconsider their energy supply lines and production systems and perhaps pay more attention to nuclear and clean energy," Wang Jin, senior fellow at the Beijing Club for International Dialogue, a think tank under the purview of the foreign ministry, told Reuters.

China is already the world's leading source of clean energy technologies.

In the shorter term, big consumer nations have opted for a record-sized coordinated release of emergency stocks, along with requests by governments – particularly in Asia – for consumers to conserve energy.

Around 20% of world oil and liquefied natural gas supply has been blocked after Tehran effectively locked down Hormuz – the main artery for Middle East fossil fuels headed to world markets. The International Energy Agency has called it the worst disruption to global energy supplies in history. Global crude oil prices have surged to above $100 a barrel.

The crisis follows two previous major energy upsets of the 2020s: Russia's 2022 invasion of Ukraine led Europe to slash its dependence on Russian imports; and the 2020 COVID-19 pandemic triggered a sudden, massive decline in world demand for fossil fuels followed by a rebound that the world's top producers were ill-prepared to meet.

Asian dependence
Asia sources the vast majority of its oil and LNG imports from the Middle East, making it the region most affected by both higher prices and physical supply disruption caused by the Iran conflict.

The issue has revived support in some corners for nuclear energy as a way to reduce regional reliance on power fueled by natural gas and other fossil fuels.

In Taiwan, economy minister Kung Ming-hsin said on 11 March the island is considering restarting its last nuclear station, which closed in May, after the main opposition party lambasted the government following the start of the Iran conflict for phasing out nuclear power. Around one-third of Taiwan's LNG supply comes from Qatar, whose production has been cut by the fighting.

Tokyo had already been discussing the restart of reactors idling since the 2011 Fukushima disaster, as Japan looks to reduce the country's large dependence on energy imports. But politicians have called on Prime Minister Sanae Takaichi to do more to boost the industry since the start of the Iran war.

Taiwan's economy ministry said the use of nuclear power must be premised on ensuring nuclear safety. Taiwan will continue the expansion of renewable energy and natural gas storage facilities to increase safety reserves, it said. Japan's industry ministry did not reply to a request for comment.

In China, the world's top buyer of Iranian oil, refiner Sinopec has cut production by 10%. Beijing has also banned fuel exports to help avert domestic shortages.

China has, however, been relatively insulated from the crisis due to its ample emergency oil reserves and high rate of electrification, with EVs representing more than half of its domestic new car sales and its grid more than 50% powered by renewable energy sources.

In the US, by comparison, EVs are less than 10% of the market, while renewable power is around a quarter of the nation's electricity generation.

Jin, of the Beijing Club think tank, said China saw the Iran crisis as an opportunity to create new avenues for cooperation, and that Beijing sought friendly, stable energy relations with all producers.

China's foreign ministry declined comment and the National Development and Reform Commission did not respond to a request for comment.

Government officials and company executives in Japan, Taiwan, Bangladesh and Pakistan have said they also plan to diversify their import sources and buy LNG on the spot market, instead of relying on long-term contracts from the Middle East.

A strategic mistake
The cost of the EU's fossil fuel imports, meanwhile, has risen by 6 billion euros since the start of the war, putting massive upward pressure on the continent's power prices.

Being "completely dependent on expensive and volatile imports" of fossil fuels puts Europe at a structural disadvantage to other regions, European Commission President Ursula von der Leyen said in a 10 March speech, while putting forward a new programme to offer a 200 million euro guarantee for private investments in innovative nuclear technologies.

Reducing the share of nuclear in the overall mix of power supplies in Europe over the past 25 years "was a strategic mistake," von der Leyen said.

EU member states led by Germany had shut down nuclear plants in recent decades amid worries about accidents and radioactive waste, reducing generation to a 15% share of the trade bloc's total from about a third in 1990.

To shield residents and businesses from spiking power costs, the European Union is drafting changes to its carbon market to try to curb CO2 prices, alongside state aid measures like subsidies and tax breaks.

Russian perks
As the world's largest oil and gas producer, the United States is less concerned about domestic supply shortfalls. It sources only a small amount of its imports from the Middle East. But Washington is focused heavily on ways to tame global energy prices while conducting the war.

A White House official said the disruption to Middle East supply was a reason for countries to increase production of fossil fuels, not replace them.

"The terrorist Iranian regime's control over a chokehold like the Strait of Hormuz has proven that our allies need to invest in infrastructure to produce reliable, affordable, secure energy sources like crude oil and natural gas," said White House spokeswoman Taylor Rogers.

Consumer price inflation is a key vulnerability for President Donald Trump and his Republicans leading into November's midterm elections.

As part of efforts to boost global supply, the Trump administration has eased sanctions on Russia to allow other countries to purchase more Russian oil.

The Iran crisis may also prompt a reassessment of western sanctions on Russian LNG, according to analysts, as the EU and Asian importers struggle from the loss of supply since the onset of the conflict.

LNG makes up 45% of the EU's total gas imports, up from 20% in 2021, before the 2022 Ukraine war led European nations to replace Russian pipeline gas.

"EU politicians are back on the backfoot," said a gas trader at Vitol, a commodity trading house. "This looks like 2022 all over again."

The EU's ambitious plans for green energy could eventually limit its exposure to oil disruptions. But it also risks building a new dependency on China, said Bart Groothuis, a member of the European Parliament and vice-chair for the delegation for relations with Iran.

"We're building new dependencies and new problems inside our energy infrastructure by building dependencies, total dependencies, on Chinese hard and software," Groothuis said.