War and Energy: How Conflict Rewires Global Markets

The global energy system is designed for efficiency under stable conditions, not resilience under disruption. Approximately 60 percent of internationally traded crude oil moves by sea, through a network of maritime chokepoints where geography concentrates shipping traffic into narrow passages that are vulnerable to military interdiction, mine warfare, missile attack, or insurance market withdrawal. The Strait of Hormuz, through which approximately 20 to 21 million barrels of crude oil and petroleum products transit daily (representing roughly 20 percent of global oil consumption), is the single most consequential chokepoint in the global energy system. The Bab el-Mandeb strait connecting the Red Sea to the Gulf of Aden handles approximately 4 to 5 million barrels per day. The Strait of Malacca, connecting the Indian and Pacific Oceans, handles approximately 16 million barrels per day of crude and petroleum product flows destined primarily for China, Japan, and South Korea.

Military conflict near any of these chokepoints does not need to physically block shipping to disrupt energy flows. The mechanism operates primarily through the insurance market. War risk insurance premiums for vessels transiting conflict zones can increase from baseline levels of 0.01 to 0.05 percent of hull value to 1 to 5 percent or higher during active hostilities. For a Very Large Crude Carrier valued at $100 million to $150 million, this represents an increase from approximately $10,000 to $50,000 per transit to $1 million to $7.5 million, costs that are passed through to cargo owners and ultimately to refiners and consumers. The Houthi attacks on Red Sea shipping beginning in late 2023 demonstrated this mechanism clearly. Without sinking a single laden tanker, the attacks were sufficient to redirect approximately 90 percent of container traffic and a substantial portion of tanker traffic away from the Suez Canal route, adding 10 to 14 days of transit time and increasing shipping costs by 200 to 400 percent on affected routes.

The insurance market's role as a transmission mechanism is underappreciated in most energy price analyses. Lloyd's of London and the broader marine insurance market maintain a list of designated war risk zones. When a region is added to or escalated on this list, insurance costs for all vessels transiting the area increase immediately, regardless of whether any specific ship is under threat. This creates a market-wide cost increase that is equivalent to a tax on energy flows through the affected region, even when physical supply is uninterrupted.

The conflict in Ukraine, beginning in February 2022, produced the most significant restructuring of global energy trade since the 1973 Arab oil embargo. European Union sanctions on Russian crude oil (implemented through the December 2022 price cap mechanism and the ban on seaborne imports) and the disruption of the Nord Stream natural gas pipelines forced a wholesale reorientation of European energy sourcing. Germany, which had received approximately 35 percent of its natural gas from Russia via pipeline, had to replace this supply within months through a combination of increased LNG imports, demand reduction, coal generation revival, and accelerated renewable deployment.

The International Energy Agency documented that European natural gas imports from Russia declined from approximately 155 billion cubic meters in 2021 to fewer than 30 billion cubic meters by 2024. This 80 percent reduction was absorbed through a combination of demand destruction (European industrial gas consumption declined by approximately 20 percent), increased LNG imports from the United States, Qatar, and Australia, and fuel switching. The economic cost was substantial. European wholesale natural gas prices peaked at approximately 10 times their pre-crisis levels in August 2022, and while they have subsequently declined, they remain structurally higher than the pre-conflict period, permanently increasing European industrial energy costs relative to US and Asian competitors.

Russian crude oil exports were redirected rather than reduced. China and India dramatically increased purchases of discounted Russian crude, with India's Russian oil imports increasing from near zero to approximately 1.5 to 2 million barrels per day by 2024. This redirection kept Russian crude flowing into the global market but altered the geographic pattern of trade and created a two-tier pricing structure where Russian Urals crude traded at discounts of $15 to $30 per barrel below Brent benchmark prices. The discount represented a revenue loss for Russia of approximately $30 to $50 billion annually, partially offsetting the benefit of elevated benchmark prices.

The structural lesson from the Russia-Ukraine energy disruption is that conflict can rewire global trade flows permanently. European investment in LNG import terminals, renewable energy capacity, and energy efficiency measures, undertaken under crisis conditions, has created infrastructure that will not be abandoned even if geopolitical conditions change. The IEA has concluded that European gas demand from Russia will likely never return to pre-conflict levels regardless of the conflict's resolution, representing a permanent shift in global energy trade architecture.

A military conflict involving Iran and potentially drawing in Gulf Cooperation Council states, the United States, and Israel would represent the most consequential energy market disruption scenario in the current threat environment. Iran's ability to threaten shipping in the Strait of Hormuz through its arsenal of anti-ship missiles, naval mines, fast attack craft, and submarine capabilities has been a central concern of energy security planners for decades. The US Fifth Fleet, based in Bahrain, maintains a permanent presence to deter and if necessary counter such threats, but the narrow geography of the Strait (approximately 21 miles wide at its narrowest, with shipping lanes of approximately 2 miles in each direction) means that even limited military action could render the passage temporarily impassable to commercial shipping.

The Congressional Research Service and the International Institute for Strategic Studies have both assessed that Iran could not permanently close the Strait of Hormuz against a determined US and allied naval response. However, the distinction between permanent closure and temporary disruption is crucial. A closure lasting even two to four weeks would remove approximately 280 to 420 million barrels from accessible global supply (at 20 million barrels per day), an amount that exceeds the combined strategic petroleum reserves of OECD nations available for rapid release. The price impact would be immediate and severe, with most analysts estimating that Strait of Hormuz disruption would push Brent crude to $150 to $250 per barrel depending on the duration and the market's assessment of resolution prospects.

Iran's own oil production of approximately 3 to 3.5 million barrels per day would likely be disrupted during any conflict, removing additional supply. Saudi Arabia, the UAE, and Kuwait would face the question of whether alternative pipeline export routes (the East-West Pipeline in Saudi Arabia and the Abu Dhabi Crude Oil Pipeline bypassing the Strait) have sufficient capacity to maintain exports. These alternative routes have a combined capacity of approximately 6 to 7 million barrels per day, well below the 20 million barrels per day that normally transit the Strait. The gap would need to be filled by production increases from non-Gulf sources, strategic reserve releases, and demand destruction, a combination that would take weeks to months to achieve and would only partially compensate for the supply loss.

Military conflicts increasingly target energy infrastructure directly. The attacks on Saudi Aramco's Abqaiq processing facility and Khurais oil field in September 2019, attributed to Houthi forces with Iranian support, temporarily removed approximately 5.7 million barrels per day of processing capacity, roughly half of Saudi Arabia's production. While Saudi Aramco restored full capacity within weeks, the attack demonstrated the vulnerability of concentrated processing infrastructure to drone and missile strikes.

The Russia-Ukraine conflict has featured systematic targeting of energy infrastructure by both sides. Ukrainian attacks on Russian oil refineries have periodically reduced Russian refining capacity and contributed to domestic fuel shortages. Russian strikes on Ukrainian power infrastructure have destroyed a substantial portion of the country's electricity generation and distribution capacity, creating a humanitarian crisis and demonstrating the effectiveness of infrastructure targeting as a military strategy. The European Geopolitical Intelligence Network has assessed that the systematic destruction of Ukrainian energy infrastructure has created a reconstruction cost estimated at $50 to $100 billion for the energy sector alone.

Pipeline infrastructure is particularly vulnerable to disruption. The sabotage of the Nord Stream pipelines in September 2022, which destroyed a substantial portion of the pipeline capacity that had carried Russian gas to Germany, demonstrated that even undersea infrastructure in waters patrolled by NATO navies is not secure against determined sabotage. The cost of replacing the destroyed capacity, if it were to be rebuilt, would exceed $10 billion and require years of construction. The incident established a precedent that has increased the perceived risk premium for all cross-border energy infrastructure projects.

Cyberattacks on energy infrastructure represent a growing threat vector. The Colonial Pipeline ransomware attack in May 2021, which shut down the largest fuel pipeline system in the United States for six days, demonstrated that digital attacks can produce physical supply disruptions. The US Department of Energy and the Cybersecurity and Infrastructure Security Agency have identified the energy sector as a priority target for state-sponsored cyber operations, with Russian, Chinese, Iranian, and North Korean actors maintaining persistent access to critical energy infrastructure networks in the United States and allied nations.

War risk premiums in shipping insurance propagate through the economy in ways that extend far beyond the direct cost of insuring vessels. When insurance costs increase for a specific route, shipping companies either absorb the cost (reducing margins), pass it through to cargo owners (increasing delivered commodity prices), or reroute vessels around conflict zones (increasing transit times, fuel consumption, and effective shipping capacity requirements). The Red Sea disruption of 2024 and 2025 demonstrated all three mechanisms simultaneously.

Container shipping rates on Asia-Europe routes approximately tripled during the peak of Red Sea rerouting, from approximately $1,500 per forty-foot equivalent unit to $4,000 to $6,000. This increase affected not only energy commodities but all traded goods moving on affected routes, including manufactured goods, consumer electronics, automotive components, and agricultural products. The rerouting around the Cape of Good Hope added approximately 3,500 nautical miles and 10 to 14 days to the journey, requiring additional fuel consumption of approximately 1,500 to 2,000 tons of marine fuel per voyage for a large container vessel. At elevated fuel prices, this additional consumption cost translated into $700,000 to $1.5 million per voyage, costs ultimately borne by importers and consumers.

The effective reduction in global shipping capacity caused by longer transit times created a secondary inflationary effect. With vessels spending more time at sea on rerouted voyages, fewer ships were available for other routes, tightening capacity across the global container and tanker fleet. The United Nations Conference on Trade and Development estimated that the Red Sea disruption reduced effective global container shipping capacity by approximately 9 to 12 percent, creating knock-on rate increases even on routes not directly affected by the conflict zone.

The increasing frequency of attacks on energy infrastructure, from pipelines and refineries to power grids and shipping lanes, is changing the calculus for long-term energy investment. Projects that require physical infrastructure crossing conflict zones or transiting disputed waters now carry a risk premium that was not systematically priced a decade ago. This risk repricing has several consequences.

First, it increases the cost of capital for cross-border energy infrastructure projects, making some projects that were economically viable under stable geopolitical conditions no longer financially attractive. The cancellation or deferral of multiple pipeline projects in the Middle East, Central Asia, and Eastern Mediterranean reflects this repricing. Second, it incentivizes investment in domestically sourced energy, including renewable energy, nuclear power, and enhanced domestic fossil fuel production, even when these alternatives are more expensive than imported energy on a pure cost basis. The energy security premium, the additional cost that nations are willing to pay for domestically controlled energy sources, has increased measurably since 2022.

Third, the weaponization of energy infrastructure is accelerating the development of strategic petroleum reserves and emergency energy sharing arrangements among allied nations. The IEA's coordinated release mechanism, tested multiple times since 2022, has demonstrated that collective action can moderate price spikes but cannot eliminate them. The limitations of this mechanism, including the finite size of reserves, the logistical challenges of physical delivery, and the inability to replace sustained production losses, mean that strategic reserves function as shock absorbers rather than shock preventers.

The institutional conclusion is that military conflict has become a permanent feature of energy market risk assessment rather than a tail event that can be excluded from base-case planning. Energy companies, financial institutions, shipping operators, and sovereign energy planners must incorporate conflict scenarios into their investment decisions, hedging strategies, and infrastructure planning. The cost of this incorporation, paid through higher insurance premiums, redundant infrastructure, and strategic reserve maintenance, represents a structural increase in the global cost of energy that will persist regardless of whether any specific conflict is resolved.

The convergence of multiple conflict-related energy disruptions, from the Russia-Ukraine war to Red Sea shipping attacks to Persian Gulf tensions, has fundamentally altered the energy security strategies of major consuming nations. The European Union's REPowerEU plan, launched in response to the Russian gas supply disruption, committed approximately 300 billion euros to accelerating renewable deployment, energy efficiency improvements, LNG import infrastructure, and hydrogen production. Japan has revised its Basic Energy Plan to increase the role of nuclear power and reduce dependency on Middle Eastern oil. The United States has authorized increased domestic production from the Strategic Petroleum Reserve drawdown proceeds and accelerated LNG export terminal construction.

These strategic responses share a common logic: reducing exposure to geographically concentrated energy sources and transit routes. The practical effect is a global energy system that is becoming more diversified, more redundant, and more expensive. The efficiency gains from concentrated production and direct shipping routes are being sacrificed in favor of resilience, security, and domestic control. This trade-off, between cost and security, defines the energy policy landscape for the remainder of the decade and establishes the structural context within which any future oil price shock would occur.

For strategic planners and investors, the implication is that energy costs are entering a structurally higher range even without an extreme price spike. The war premium, insurance premium, rerouting premium, and diversification premium collectively add an estimated $10 to $25 per barrel equivalent to the structural cost of oil in the current geopolitical environment. At $80 baseline oil, this premium is absorbed within normal economic fluctuations. At $150 or $200, it represents an additional burden on an already stressed system. The interaction between baseline prices and structural risk premiums is what makes the $150 to $200 oil scenario a question of cascading effects rather than simple arithmetic.