Strait-jacket: Global Energy Flows and the War with Iran

On the morning of February 28, the United States woke up to the news that U.S. and Israeli forces had launched a bombing campaign against Iran. In the days that followed, President Donald Trump and senior Cabinet officials offered competing casus belli, including, variously, the need to forestall expected retaliation for an imminent Israeli attack on Iran; Tehran’s decades-long history of malign activities in the region; and the danger from its apparently not-obliterated nuclear program.

Whatever the rationale, the sudden conflict has imperiled a major trade route through the Persian Gulf, scrambling oil and gas flows and raising benchmark prices in major markets. The longer that the conflict goes on, the greater the threat to both global prices and individual countries reliant on Gulf supplies. Any hopes the administration may have harbored of a Venezuela-style re-capitation exercise seem to have collapsed, as it is now talking about a conflict not of days but weeks or months. So, on Tuesday, I sat down with CRI Senior Fellow Clara Gillispie to explore the war’s energy risks for major importers of oil and gas from the Gulf. Our conversation has been edited for length and clarity.

Iversen: On March 2, in response to the U.S.-Israeli attack on Iran, the Iranian Revolutionary Guard Corps announced that it would attack any ship that attempted to transit the Strait of Hormuz, a narrow neck of water at the entrance of the Persian Gulf. Traffic through the strait plummeted, followed by sharp increases in oil and gas prices.

Can you talk a little bit about the importance of the strait to global oil and gas markets and, to the extent that fuel shipments continue to be blocked, which individual countries are most likely to be affected?  

Gillispie: The Strait of Hormuz is a critical global energy choke point. Roughly 20 percent of all global oil and natural gas supplies flow through it, with few alternative routes to market. Though other oil and gas producers within and beyond the Middle East, including the United States, have the potential to boost production to address some of the shortfall from an extended disruption in the strait, even collectively these producers lack the excess or otherwise underutilized production capacity to fully make up the difference.

Should oil and gas trade via the Strait of Hormuz remain substantially lower for an extended period, the negative effects of disruption will be felt globally. But, most immediately—and perhaps most acutely—they will be felt in Asia. More than 80 percent of the oil and liquified natural gas (LNG) shipped through the Strait of Hormuz in 2024 went to Asian markets. Most of the volumes for both fuels went to just four countries: China, India, South Korea, and Japan. However, several other Asian economies, including Pakistan, Taiwan, and Vietnam, also heavily rely on these supplies, and would be hit hard by an extended disruption to trade flows.   

Iversen: Let’s look at some of those country-specific challenges. You mentioned China. An analysis in Politico showed that about half of China’s oil imports originated in Iran or Venezuela, or came through the Strait of Hormuz. How well prepared is China for a shock like this? To what extent is that knowable?  

Gillispie: China has been very intentional about trying to minimize its reliance on Middle Eastern oil and gas. It has diversified its suppliers and supply routes, which in recent years has meant a growing partnership with Russia and, up until the last year, an expanding energy trade relationship with the United States. Reducing overall demand for energy imports via promoting switching to alternative fuels and technologies has also been a part of China’s overall strategy. Efforts to champion electric vehicles, solar PV production, and a range of other initiatives typically viewed as part of its green industrial strategy are, to be sure, partly motivated by ambitions for industrial leadership, but they are also very much animated by a fundamental desire to reduce domestic demand for imported energy.  

However, as you point out, even with these efforts China is still highly exposed to the negative impacts of disruptions in global oil and gas markets at large and in the Middle East specifically. How well prepared it is currently to address shortfalls when switching is not possible is a bit hazy, given that the Chinese government does not report data on its oil inventories and there are similar deficiencies in what we know about its natural gas storage levels. Although various groups estimate that China could easily have somewhere north of one hundred days‘ worth of stockpiled oil, based on what might be inferred from other datasets—such as for oil import, export, and consumption levels—there are some notable caveats on our certainty about these estimates, which makes China’s response something to continue to watch.  

Iversen: Staying in Northeast Asia, how vulnerable is Japan to oil and gas market disruptions? 

Gillispie: Japan relies on imports to meet 100 percent of its oil and natural gas needs, so global supply shocks can be incredibly painful. To that end, and to alleviate public concern, Prime Minister [Sanae] Takaichi made remarks over the weekend in which she stressed two points that I find notable in terms of thinking about how the Japanese government is approaching what, ultimately, remains a very fluid situation. First, she noted that Japan itself is currently well supplied, with over 250 days of oil supply in storage. This ample stockpile gives Japan some flexibility to consider releases that might alleviate strains in neighboring countries or the wider market. Takaichi also underscored that the length of time it takes for supplies to transit from the Strait of Hormuz to Japan is twenty-eight days—the implication being that, given that additional supplies from the gulf were still en route as of this past weekend, Japan still had a bit of a buffer before it might expect to see disruption translate into missed deliveries, or otherwise necessarily need to tap into its stockpile to meet its domestic needs.

Even so, one thing that we might expect to hear more of in coming weeks is how and to what extent Japan is looking to mitigate the risks of any shortfall in natural gas supply, as storage levels there can cover only twelve days’ worth of demand. To that end, one thing to watch is the Indo-Pacific Energy Security Ministerial and Business Forum in Tokyo, which will be cohosted by Japan’s Ministry of Economy, Trade and Industry and the National Energy Dominance Council of the United States in the coming days. The meeting was already expected to focus on U.S. ambitions to increase LNG and other energy exports to the region, an issue that has only become more timely this week.   

Iversen: I want to ask about India. Since 2022, India has been buying large volumes of Russian oil, which is trading at steep discounts due to Ukraine-related sanctions. Under the threat of tariffs from the United States, India has been ramping down its purchases of Russian oil over the last several months, replacing them with imports from the Middle East.

Now that it’s more exposed to a suddenly volatile global market, has there been any sort of statement from Delhi? And, after the U.S. Supreme Court invalidated the tariff authority Washington was relying on, do you anticipate that it might change its policy vis-à-vis Russia? 

Gillispie: For a much more in-depth treatment of India’s energy posture and decision-making, I’d direct readers to an essay series convened by my colleague, CFR Senior Fellow Manjari Chatterji Miller, to which I was delighted to contribute, which also features a fantastic piece by Ashwani Swain on India’s oil security strategies. But big picture, India has long been between a rock and a hard place when it comes to the geopolitics of oil.  

Its demand for oil has grown rapidly for decades, far exceeding its domestic production levels, generating significant concern in Delhi that high and rising energy import bills will undercut the country’s economic growth. To that end, India has built notable partnerships with not just Iran, but also Russia and Venezuela, to secure access to needed oil supplies at low (and in these cases, heavily discounted) prices. With all three of those potential sources under notable strains, it’s an open question how India might handle the risk of missed deliveries via the strait.  

Alternative suppliers are likely to be higher cost. So, one of the initial reactions that we’ve seen out of Delhi has been a series of conversations on when and how it might trigger its own strategic reserves to alleviate upward pressures on prices or supply shortfalls. However, given current infrastructure, the amount of oil that India can stockpile is significantly lower than in Japan and China; some analysts believe that current inventories may be only about twenty to twenty-five days’ worth of supply. 

And while I’ve largely focused here on oil security-specific challenges, India also faces similar and acute challenges with guaranteeing natural gas supply security in the event of an extended market disruption, and its stores of that fuel are even more modest.  

One of the things we have heard less of—so far—is what all this uncertainty might mean for India’s larger vision for boosting its energy self-sufficiency levels through a shift to a cleaner energy mix. It is early days, but is something that I will be continuing to watch.  

Iversen: Let’s talk briefly about that before we sign off. How are policymakers in these countries taking these types of supply shocks into account as they’re thinking through their long-term energy priorities? 

Gillispie: Russia’s invasion of Ukraine offers an interesting comparative scenario here. In 2022, economies across the Indo-Pacific faced a really painful period of tight natural gas markets and, in response, took a range of near- and longer-term steps designed to address concerns about rising energy prices as well as outright shortages. 

In addition to focusing on bolstering and diversifying import agreements, multiple countries pivoted to an energy source where prices were lower and the infrastructure to absorb and utilize that supply was already in place: coal. This coal-gas switching not only had an impact on the environment—given coal’s higher carbon emissions—but also led to strains in global coal markets, driving prices up for this fuel. It also, ironically, incentivized China and several other countries to plan for longer and higher coal use in their national energy strategies, rather than discouraging consumption.  

A greater focus on affordability, however, didn’t necessarily mean these countries backed away from their wider energy transition goals. Alongside this emphasis on bolstering alternatives to high-priced gas, you did see, for example, a continued and even accelerated focus on bringing solar, wind, and other renewable energy capacity online. 

Similarly, and I think one area where 2026 might not look like 2022, is the serious interest in nuclear energy that you’re seeing in China, India, Japan, and elsewhere. Nuclear can’t effectively fill the gap tomorrow, but the regional interest in nuclear does speak to a larger strategic ambition for a more sustainable energy mix, in terms of not only environmental but also economic and geopolitical security goals.