HOUSTON — The CEOs of the world’s most influential oil and gas companies delivered a sobering message this week about the impact of the war in Iran on energy supplies and its long-term consequences for the global economy.
Executives gathered in Houston, Texas, for S&P Global’s annual CERAWeek energy conference to take stock of the war. They warned that the market did not reflect the scale of the disruption to oil and gas supplies.
Asia and Europe will face fuel shortages if the war drags on, the leaders said. Oil prices are likely to remain high even if the conflict ends as countries replenish depleted reserves, they said.
“You simply cannot consume 8 to 10 million barrels of oil a day and about 20 percent of the [liquefied natural gas] market outside the global arena without having significant repercussions,” ConocoPhillips CEO Ryan Lance told CERAWeek attendees.
Iran essentially imposed a economic blockade against Middle Eastern oil producers by closing the Strait of Hormuz, said Sheikh Nawaf al-Sabah, CEO of the Kuwait Petroleum Corporation. The strait is the vital artery that connects oil exports from Gulf Arab producers to global markets.
“This is an attack not only on the Gulf, but it is an attack that takes the global economy hostage,” al-Sabah said at the conference. The CEO warned that the war would have a “domino effect” on the global economy.
“The costs of this war do not remain limited to the geographical limits of this region,” al-Sabah said. “They extend throughout the supply chain.”
The oil shock is the worst since the Arab oil embargo against the United States and other Western countries over their support for Israel in the 1973 Middle East war, said Paul Sankey, an independent analyst at Sankey Research.
“This is the worst I’ve seen,” said Sankey, who began his career at the International Energy Agency in 1990. “We haven’t seen anything like this, maybe since 1973. We’ve never seen the Strait of Hormuz closed.”
“We are in a de facto situation where the Iranians control the strait,” Sankey said. “The situation is therefore extremely serious.”
Call on the US military to protect energyThe executives’ comments contrast with the Trump administration’s efforts to reassure an anxious industry and volatile oil market.
Energy Secretary Chris Wright told CNBC that the market was facing a “period of short-term disruption“The price is worth paying if the long-term benefits of Iran’s disarmament are to be achieved,” he said.
But the price is very high for an oil and gas industry whose assets are now exposed to attack. Conoco is “pleading” with the Trump administration for “military protection around U.S. assets in Qatar and hundreds of millions of dollars of investment,” Lance said.
Iran has forced the closure of the world’s largest liquefied natural gas hub in Qatar with drone attacks. Conoco is a major investor in this facility.
“We had to evacuate a number of our employees, our non-essential staff,” Lance said. “It’s been a chore the last few weeks.”
Oil prices will remain highOil prices have been volatile this week, falling whenever hopes for a negotiated end to the war rose and rising when perceived tensions reignited. On Monday, President Donald Trump retreated of his threat to bomb Iranian power plants. Throughout the week, he asserted that Iran wants to make a deal to end the conflict.
But finally investors remained on their guard, with oil prices stabilize on Friday at their highest level in more than three years. American crude oil prices have jumped 49% to $99.64 per barrel since the United States and Israel attacked Iran on February 28. Brent pricethe international benchmark, climbed more than 55% to $112.57 per barrel.
“I hear and read a lot of discussions about prices and such, all interesting, but it’s the physical flows that count,” Shell » said CEO Wael Sawan. “Our customers need molecules, they need electrons.”
Chevron CEO Mike Wirth the physical oil supply is much more restricted than indicated by prices on the futures market. The market reacts based on “little information” and “perceptions,” the CEO said.
“There are very real physical manifestations of the closure of the Strait of Hormuz that are rippling across the world and through the system that I think are not fully captured in the oil futures curves,” Wirth said.
It will take three to four months for Gulf Arab countries to fully restore production as they had to shut down their oil wells due to the closure of the strait, said al-Sabah, CEO of Kuwait Petroleum.
The floor price of oil “probably needs to rise,” Conoco’s Lance said, indicating that prices are unlikely to return to pre-war levels in the near future, despite assurances from the Trump administration.
Cheniereone of the world’s largest LNG exporters, is doing its best to meet demand from Asian countries that rely heavily on Qatar’s natural gas imports, CEO Jack Fusco said. But the company is already reaching peak production, Fusco said.
“We are going to try to get as many molecules as possible to countries in Asia that really need them,” the CEO said. “But it’s a 28-day trip from the Gulf Coast to any part of Asia, so it’s not going to happen overnight.”
Fuel shortagesFuel supplies face an even bigger disruption than oil, said Shell CEO Sawan. Jet fuel supplies are already being hit and diesel will come next, followed by gasoline, he said.
The war has triggered a ripple effect of shortages that are spreading across major Asian economies and will reach Europe by April, the CEO said. Governments around the world are stockpiling and protecting their own supplies, he said.
“We need to make sure that this doesn’t amplify what constitute serious physical strains,” Sawan said.
Jet fuel and diesel prices jumped $200 per barrel and $160 per barrel, respectively, said TotalEnergies Patrick Pouyanné, CEO. China has banned exports of petroleum products and Thailand is rationing gasoline, he said.
“The crisis is starting to really affect customers” Pouyanné told CNBC.
“Everything will depend [on] how long this conflict will last,” the CEO said. “I hope it won’t be too long. Otherwise, we will have very, very dramatic consequences. »
Likely escalationThe war is unlikely to end soon and the risk of escalation is high, said Vali Nasr, an expert on Iran at Johns Hopkins University. Iran is not seeking a ceasefire with Trump, Nasr said. Tehran wants a grand deal that gives it control of the strait, economic compensation and security guarantees, he said.
Iran is waging an all-out war while the United States is waging a limited air campaign, said Gen. Jim Mattis, Trump’s defense secretary during his first term. The goal of regime change in Tehran is illusory, he said. The conflict is at a stalemate and one side now risks escalating further, Mattis said.
The U.S. Navy will have difficulty protecting shipping lanes from the Persian Gulf, through the Strait of Hormuz and into the Gulf of Oman, he said. The Iranians have hundreds of miles of sea lanes that they can attack and that the United States should protect, he said.
The war could break the economic model developed by the Arab Gulf countries. Iraq, Qatar, the United Arab Emirates and potentially Saudi Arabia could see a 30% drop in annualized gross domestic product, Sankey said.
The United States did not consult its Gulf Arab allies before entering the war and Trump will not be able to simply declare victory and walk away, Mattis said. Iranians can vote on ending the war, he said.
“I don’t think we can just walk away from it,” Mattis said. “We are in a difficult situation.”
—CNBC Pippa Stevens And Brian Sullivan contributed to this report