Energy volatility permanent after Hormuz closure, warns IEA

The oil supply disruption and price volatility that followed the closure of the Strait of Hormuz are not a temporary shock that will subside with any ceasefire, the head of the International Energy Agency has warned. They are the new baseline for global energy markets.

Fatih Birol, the IEA’s executive director, told the Canada Growth Summit in Toronto on 8 May that “the name of the game could well be the volatility” and that “oil security will still be a key issue” even if Iranian supply eventually returns. The IEA has released 20 per cent of available oil reserves to combat rising prices and stands ready to release more if disruptions persist. The warning was the most explicit statement yet that the world’s energy watchdog sees no quick return to normal.

The scale of the supply shock is without modern precedent. The IEA has labelled the disruption the largest in the history of the global oil market, with 8 million barrels per day taken offline in March as Iran blockaded the Strait of Hormuz after a joint US-Israeli strike on its territory in late February. The strait normally carries about one-fifth of the world’s oil and a large share of its liquefied natural gas.

Oil prices have tracked the disruption. Brent crude rose above $102 per barrel in early May as Iran reversed a brief claim that the strait was open, and analysts project a range of $134 to $250 per barrel depending on how long the closure lasts. The US Energy Information Administration estimates Brent will average $90 per barrel across the second quarter of 2026, though its forecast includes a “persistent risk premium” that reflects a market now driven more by geography than by supply-demand fundamentals.

The Asia exposure

No region is more exposed to the Hormuz disruption than Asia. About 80 per cent of the oil transiting the strait is bound for Asian economies, according to the IEA, and governments from Tokyo to Dhaka are searching for alternatives.

Japan’s Prime Minister Sanae Takaichi, visiting Australia on 4 May, said “the effective closure of the Strait of Hormuz has been inflicting enormous impact on the Indo-Pacific” and pledged that “Japan and Australia will closely communicate with each other in responding with a sense of urgency.” The two countries signed agreements covering energy and critical minerals, with Australia committing up to A$1.3 billion (US$937 million) to critical mineral projects supplying Japan with gallium, nickel, graphite, rare earths, and fluorite. Australia also agreed to buy A$10 billion (US$7 billion) of Mogami-class stealth warships from Japan.

Bangladesh, which imports 95 per cent of its oil, has begun rationing fuel. South Korea’s stock market is among the worst affected globally. China, the world’s largest energy consumer, has increased both domestic coal production and renewable investment. Analysts at the East Asia Forum noted that the Hormuz closure is “opening doors for China’s energy leadership” as Beijing expands its role as a supplier of grid technology and critical minerals.

The financial shock

The energy disruption has spread well beyond energy markets. In March, $2.5 trillion was wiped from the value of global bonds, according to Bloomberg, as markets repriced for higher-for-longer inflation. Foreign central banks cut their holdings of US Treasuries at the New York Federal Reserve by $82 billion since the crisis began in February 2025, the Financial Times reported, the lowest level since 2012.

The Dallas Federal Reserve estimates the supply disruption could cut nearly three percentage points from global GDP growth this quarter. The International Monetary Fund revised its 2026 global growth forecast down 0.3 percentage points to 4.3 per cent, below its pre-war estimate. “The war ultimately points to higher prices and weaker growth,” the IMF said in a late-March blog post.

Central banks face a difficult choice. Higher energy prices feed into inflation, consumer sentiment, and transport costs. The University of Michigan’s consumer sentiment index hit a record low in early May as petrol prices overtook strong jobs data. But raising rates to contain energy-driven inflation risks making the slowdown worse.

Middle Eastern economies are losing revenue at the same time. The oil-producing Gulf states that normally ship through Hormuz are losing more than $500 million per day in export revenue. The United Arab Emirates departed OPEC in April, a move that analysts called a structural blow to the cartel’s pricing power, and has asked the US for financial support to offset damaged gas fields.

The fertiliser shock

Jean-Marie Paugam, a senior official at the World Trade Organization, warned that “the fertiliser shock is a greater immediate threat than the oil and gas shock.” The assessment points to a supply chain that few consumers track.

Qatar and Gulf states export about one-third of the world’s urea and one-half of its seaborne sulphur, both essential for fertiliser production. About 45 per cent of seaborne sulphur originates from Gulf refineries, according to data cited by former US climate envoy John Kerry in a Semafor analysis published on 5 May. With those refineries disrupted, fertiliser prices have risen during the Northern Hemisphere planting season, raising the prospect of smaller crop yields and higher food prices later in the year.

The disruption’s path through agriculture is what Kerry called “the largest energy crisis in modern world history.” In the Semafor piece, Kerry argued that the lag effects mean the worst is still ahead. March crude disruptions become April petrol shortages. May brings diesel shortages. June delivers fertiliser price spikes that land when crops are in the ground. “The age of assuming someone else’s energy will always be available, at a price we can afford, through a route we don’t control, is over,” Kerry wrote.

The renewables surge

One consequence of the crisis has been a rapid increase in renewable energy investment. The United States has expanded solar module manufacturing capacity to 65 gigawatts, up from 8 gigawatts in 2022. Governments in Spain, Germany, and France have fast-tracked wind and solar approvals that had been stalled for years.

The gap in electricity prices between Spain and Italy shows the value of deployed renewables. Spain, which has built more than 40 gigawatts of solar and wind capacity since 2019, sees gas set its wholesale power price in about 15 per cent of hours. Italy, which deployed far less, sees gas set the price in about 90 per cent of hours. Spain’s forecast average power price for 2026 is about €66 per megawatt-hour. Italy’s is nearly double.

The New York Times reported on 6 May that the International Renewable Energy Agency has tracked a surge in government inquiries about faster transition timelines since the Hormuz closure. The IEA’s Birol told the Guardian in late April that the oil crisis “has changed the fossil fuel industry for ever, turning countries away from fossil fuels to secure energy supplies.”

What happens next

Even under optimistic assumptions, supply will not return to pre-crisis levels quickly. A New York Post analysis on 5 May said oil production would stay below normal until after the US midterm elections in November, however soon the war ends. The IEA’s Birol told Xinhua that any restoration of supply would happen “gradually.” Trading desks treated the word as a signal that prices will remain elevated through the northern autumn.

Governments are buying time with emergency releases and policy changes. The IEA’s coordinated 20 per cent reserve drawdown is the headline figure. Individual countries have opened domestic buffers: the Philippines released a 20 billion peso ($333 million) emergency energy fund in April. India raised the fill rate of its strategic petroleum reserve. France, Germany, and the Netherlands extended fuel subsidies and price caps that were due to expire this spring.

Three longer-term shifts are under way. Countries are expanding domestic hydrocarbon production where geology allows. The renewables and battery storage buildout that began before the crisis is accelerating. Investment is flowing into firm clean baseload, including nuclear plants with decade-long construction timelines and geothermal projects that can deliver power sooner. None of these shifts will mature within the next year.

For now, energy volatility is the base case. Three months of supply disruption has redrawn the global energy map. Eight months would rewrite the rules.