Analysis-Iran War Energy Shock Sparks Global Push to Reduce Fossil Fuel Dependence

Iran War Energy Shock Triggers Global Drive to Cut Fossil Fuel Use

By Anna Hirtenstein and Kate Abnett

Global Response to the Iran War Energy Shock

March 18 (Reuters) - 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.

Historical Context and Recent Developments

Iran's closure of the vital Strait of Hormuz shipping lane, after the U.S. and Israel attacked on February 28, 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.

Expert Perspectives on Energy Security

"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 U.S. consultancy McLarty Associates.

Policy Shifts and Strategic Responses

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.

China's Approach to Energy Security

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.

Short-Term Measures and Market Impact

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 COVID19 pandemic that triggered a sudden, massive decline in world demand for fossil fuels followed by a rebound that world's top producers were ill-prepared to meet.

Both shocks contributed to a sustained rise in inflation.

Regional Impacts and Responses

Asian Dependence on Middle East Energy

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.

Cuts to oil and gas shipments have led refineries in Singapore and Malaysia to reduce output and petrochemicals firms in Japan and Taiwan to cut supply to customers.

Revival of Nuclear Energy in Asia

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 March 11 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.

China's Energy Strategy Amid Crisis

In China, the world's top buyer of Iranian oil, refiner Sinopec has cut processing runs at its refineries in the country 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 U.S., 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.

Diversification of Energy Sources in Asia

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,